What’s possible? Investing with other peoples money?

Question

Hi! I’m an aspiring fix and flipper/investor. I guess I’m writing this post because I want to know what’s possible out there.

Is it possible to invest/fix and flip with no money? What’s possible? What’s been your experience? How did you do it? Would love to hear from the BP community on this.

Perry Farella · Answer

Just to add here that there is a rehab loan designed for newbie investors with built in checks and balances called HomeStyle others here have used. I use it for my clients on their single family investment property rehab purchases. You do need though a 15% down payment. But it gives you the oversight on after renovated value (ARV) and if the value isn't there the loan will not be approved. It also builds in a 10% emergency reserve fund based on the rehab budget to provide a cash cushion if a house later is found to need more work or a cost overrun etc. AND this 10% is built into ARV on the assumption you will use it. So you are protected. EXAMPLE:  House sells for 100,000 but needs 40,000 in rehab so total transaction is 140,000. The add 10% Reserve  to rehab budget or 4000 for grand total of 144,000. Down payment is 15% off the 144,000 or 21,600. So your own funds or with a partner are the 21,600.

Then you have financed both the purchase at 85% and the rehab at 85% of the deal. The loan is based on a 30 year term and todays rates around 5% to 6% but no pressure to pay to off, you could keep it over 30 years or sell and pay off the loan, all with no pre payment penalty. The principal and interest payment at 6%  is $730.20 ( plus taxes, etc.). So if you can carry that payment for the months it takes to finish the rehab prior to selling or renting it out, you are successful. The lender will always project the FUTURE rent automatically ( they don't know if you will sell it or rent it after all so have to assume renting) and give you extra income at 75% of gross projected rent as qualifying income for the loan approval, even on vacant trashed properties.

Maybe you don't yet have the 15% down but compare this approach to interest and fee costs of hard money lenders that can be from 8% to 15% around the country to this approach. Happy to be more specific any time.

Matthew Irish-Jones · Answer

@Sasha Josephs in reality a Capital partner, private money and hard money are all relative and in a lot of ways the same.  Your Capital partner is going to want the normal market rate as a return on Capital they lend out, the other lenders will do the same.

The one added feature of using a HML is they will not finance a deal they are not confident in.  They will ask for detailed material and maintenance costs, ARV projections, cost per sq ft... ect...

Although that may all sound daunting at first, it is actually a way to refine your skills and make sure the deal is good enough to justify a hard money loan.

For example:  If you found an inexperienced Capital partner and you borrowed $100,000 for the purchase, rehab, and they didn't know anything about flipping a property, you could wind up losing a lot of money.  It is not very hard to over rehab, over spend on the initial purchase and to have a home that is worth less than what you put into it.

Dan Barli · Answer

@Sasha Josephs I think it’s possible to fix and flip with none of your OWN money. But you will need the funds from somewhere, whether it be a lender or partner or sorts. Are you working with anyone?

Sasha Josephs · Answer

@Matthew Irish-Jones Makes sense. Thank you for the insight and bringing that up.

Sasha Josephs · Answer

@Perry Farella Thanks for that info. I'm going to check them out.

Sasha Josephs · Answer

@Dan Barli  Understand. I'm not working with anyone currently.

@Matthew Irish-Jones Thanks for your input. What's been your experience?

The idea of private money/hard money seems scary to me. I think my preference would be to have a capital partner and then I go and do all the work/management.

Matthew Irish-Jones · Answer

@Sasha Josephs it makes things a lot harder.  Your best bet on a fix and flip is to use a private money lender or a hard money lender.  They will sometimes loan up to 100% of the rehab cost and 90% of the sale price.

They will look for experience though, as well as your debt to income ratio, W-2 income, and any other assets you may have.  If  you have very little of any of those things you will likely not get to the 90% mark.

What’s possible? Investing with other peoples money?

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