How Much Money Can I Borrow on a Flip?
How much money can I borrower is a common question I get all the time from Real Estate Investors looking to flip properties. My answer is always the same, 'it really depends on you, the property and the situation related to your deal'.
Most hard money lenders will lend up to 100% of the acquisition and construction costs on a real estate project. That’s assuming that you are purchasing the property at 65 cents on the dollar or less, minus construction costs (which I talk about in detail on this Bigger Pockets post called The Magic Purchase Price).
It works like this:
- Purchase price of the property: $100,000
- Construction cost to renovated it: $30,000
- Total purchase price and construction costs: $130,000
- Projected after repaired value of completed project: $200,000
If these are your numbers, a hard money lender would give you 100% towards your purchase price and construction costs since combined they are equal to/less than 65% of the after repair value (ARV).
Although a lender will give you that high of leverage on your property, that may or may not make the most sense for you in your situation. It’s important to get leverage on real estate because it gives you the ability to spread your money into several different investments, but it doesn’t necessarily mean you should leverage it all the way to the top.
For instance, if you have $100,000 and you’re only doing one deal a year and it’s only going to cost you $100,000... great! Use your own money.
If you have a lot of different projects going on, it may make sense to leverage up that $100,000 into four projects putting $25,000 into each and getting a hard money or private money loan for the rest.
Although you have the ability to leverage up with a private or hard money lender and get up to 65% based off the ARV on your rehab projects, make sure you have enough cash reserve for construction overages, monthly payments and miscellaneous expenses on that investment..
An asset can turn into a liability very quickly if you can't cover the debt service or run into other issues that require additional funds.
On the other end, you also want to make sure you have enough liquid cash so you don’t lose out on an future opportunities.
Just because someone is willing to give you the most money possible for a deal, doesn’t mean you should necessarily take it because there are costs associated.
At any given time, you should make sure you have enough equity in a property so that if the market changes or something goes sideways, you can unload it at any time so it doesn’t put you out of business.