HML or my own cash on first flip deal

11 Replies

Hey guys, 

I am looking to do my first flip here very soon. I have come across some deals lately with decent numbers in great locations but where I am struggling is deciding whether to use hard money or my own cash. Obviously, a HML will cut tremendously into my profit potential. Assuming ARV and repair estimates are accurate, with high interest (13.99%) and 4 points, net profits don't look enticing with a calculation of a 6 month hold. If the property takes longer than 6 months to sell, I basically lose all profit potential since ill be paying extra interest. I am not considering any areas that have comps with a high number of days on market but I have to expect the worst.

The biggest advantage I see with hard money is that I can eventually do multiple deals at once. So, I am thinking it would be smart to use hard money later in the game as I gain some experience and confidence to where I could do multiple deals simultaneously (with obviously less profit potential on each deal) but not have to tie up cash. 

For my first deal, I am leaning more toward the cash option which would yield me almost 3x as much profit as opposed to using a HML, assuming the numbers are accurate. Is this a good idea? Am I being too greedy and thinking about profits too much as opposed to getting my first flip experience?

The way I see it is that this first deal will be the only flip I focus on, so I'm not concerned about cash reserves. Once it is sold and I see that I can excel in this business, I would use hard money or private money to do more deals and hopefully, more than one at a time. 

Any advice would be appreciated, thanks.

@Khizar Hanif

use cash first. Once you have flipped that successfully, use that to leverage better terms for HML.

Most HML will want to see some kind of track record as well.

I go the other way. Find deals that are still good with the cost of hard money built in, then go look for more deals. The last thing you want is to be half way through a rehab, find a another great deal, and have to pass because all of your cash is tied up. I'm going through that right now. In the middle of a reno and searching for another deal to close and keep the process going

As a flipper, I've borrowed from a dozen different hard money lenders, and I will tell you that I will always use hard money.

Leverage is one reason, but the other is that you have someone watching your back.  If it's your first flip, how do you know if you've done all the due diligence correctly?  As @Jason DiClemente mentioned, a deal that can't work with hard money might not be a deal at all.

I see hard money lenders as my partners. They check out the area, they confirm my ARV, they vet my contractors, they ensure that everything looks good with title, that I have the proper insurance in place, etc. I have had hard money lenders make suggestions to the kind of rehab I should do: "I think you might be over-rehabbing in your area; I don't think you should do hardwood there." And if my hard money lender won't lend on the deal, I'd probably reconsider whether it is a deal.

OPM every day of the week (Other people's money)

Thanks for your input guys. A little late to reply but better late than never, I suppose. I need to start implementing BP into my daily routine. 

After some more thought and taking you all's input into consideration, I have decided that the best route for me is indeed, HML or OPM. I have multiple lenders I can work with so I will find the best rates and can hopefully create a positive and long-term relationship with one lending party to where things can move quick!

Now, its just a matter of finding the right property with the right numbers. 

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Please for the love of god don't pay 14/4 in Texas. Are you going through a hard money broker? I don't even know any lenders doing interest rates/points that high there.

Here are some other benefits of using a hard money lender.

1. Hard money lenders want to ensure your project is profitable not only to them - but to you.

2. If you extend a good portion of your cash and something comes up and you need more than you have... wouldn't it have been less risky having that cash in the bank?

3. Can't say this part enough - you get a second (or more!) set of eyes looking at your project, area, values, and they have tons of experience!

4. It is like doing a joint venture - except you don't profit share at the end and you keep all the profits. HML costs are fixed and negotiated at the beginning of the loan, leaving you to take all the profits at the end.

I don't know how many times we have saved a borrower from a contractor that had a suspended license, who didn't quote them properly for HVAC, or who charged 20+% more than the bid should cost in their area.

Originally posted by @Kerry Boyle :

4. It is like doing a joint venture - except you don't profit share at the end and you keep all the profits. HML costs are fixed and negotiated at the beginning of the loan, leaving you to take all the profits at the end.

As a flipper, I sort of disagree with this point.  New flippers need to realize this:   As a flipper, you are the last person to get paid, and you're paid with whatever is left over.  Contractors, agents, lenders, etc. all get paid in full before you do.

The lenders usually end up making more money while taking less risk; their profit is more of a guarantee than the flipper's.

Originally posted by @Nghi Le :
Originally posted by @Kerry Boyle:

4. It is like doing a joint venture - except you don't profit share at the end and you keep all the profits. HML costs are fixed and negotiated at the beginning of the loan, leaving you to take all the profits at the end.

As a flipper, I sort of disagree with this point.  New flippers need to realize this:   As a flipper, you are the last person to get paid, and you're paid with whatever is left over.  Contractors, agents, lenders, etc. all get paid in full before you do.

The lenders usually end up making more money while taking less risk; their profit is more of a guarantee than the flipper's.

This is a fair point, JV does have value if you are new and you aren't sure what you are doing. Lenders will always make profit, unless the project goes wrong. A good lender is going to completely vet the project to reduce their risk. I'd be interested in creating a poll to see how much information lender's collect on the rehab/contractors for borrowers. I know one national lender with almost no vetting of rehab and I think a lot of their deals fall through because of it... maybe I'll create a thread/poll to see.

In just about every American town DOM is very short. I could not envision it will take 6 months to unload a property. The neighborhood must be easy to market, If you can get a HELOC for additional reserves by all means.

An investor I have worked with used their $1m heloc and bought several properties.  Initially, it was going to unloaded quickly for quick profits. She realized she is getting >10% cap rate in Northern coastal CA. Right now it is like 2.0-3%. They all are rented and have same tenants with lower rent than others.  You could also fix part of the house and rent it out until after 1 year to pay less capital gain.  In her case she got more money to invest and decided not purchase/flip at the peak-risky.

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