What's enough cash reserves?

Question

My partner and I are securing a hard-money loan to do flips. Low to mid priced homes with ARV of 80-100K. We are working on our first flip at $70k ARV. We are planning on getting a private loan of $5k so we can have some cash reserves.

The reserves would be to pay the initial initial draw to the contractor and marketing. The loan would be secured by the property until we retail it.

Is 5k enough in your opinion? Also how much should the contractor get up front. I hear many people saying 1/3 up front and the rest in 1/3's. Any thoughts on reserves and the up front to the contractor?

Thanks.

Ivan

Jon Holdman · Answer

70% of $75,000 would be $52,500
Closing costs seem high to me, but if that's what you've been told, use that.
Points would be $3,150 (6% of loan)
That looks to me you would get about $6,850 at closing with $15,000 held in rehab escrow.  So, you should be OK cash wise.

When you sell, you'll pay about 8%, plus the deferred interest.  That will net you $16,500 plus the $6,850 you got at closing.  Pretty nice.

Jon Holdman · Answer

Depends on what you pay, how much rehab will cost, the LTV for the hard money loan, the loan terms, and whether or not you have to make monthly payments.  Need more info to give a better answer.

You should be able to figure it out, though.

When you buy, you'll have about 2% in closing costs.  You can refine this once you have an actual deal.  You'll have some up front expenses like insurance, inspections, dewinterization, and the like.  You'll pay points up front.  If you have to make monthly payments, you need enough to cover that, too.  The selling costs will come out on the back end.

Assuming a 70% LTV ($50K HML), rehab plus purchase right at 70%, 4 points, 15% interest paid monthly, getting nothing at closing and getting reimbursed for rehab in thirds, you would need about $1000 for closing costs, $2000 for points, about $1000 for all the prepaid items (insurance, inspections, etc.), $3750 for interest payments, and a third of the rehab.  That's almost $8000, plus a third of the rehab.

As little as possible for contractors up front.  Nothing until they actually start, and the final payment only when its 100% done.  Get lien releases as you make payments to the contractors.

Ivan Reyes · Answer

Thanks Jon,

Details are:

Hard money loan at 70% LTV
6 pts at 15% for a 6-month loan
No payments due
All closing cost rolled in except appraisal
Purchase 25K
Rehab $10-15k
Retail $75K

- pts $2100, closing $1500, insurance/insp $1000, interest & 1/3 rehab $3750,  rehab balance $14K approx., marketing $1000, misc $1000=$24,300 approx.
- Total $49,300
- Retail $75k
- About $25k net @ 66-67% ARV

Look right to you?