My financing strategy

[Todd S.]

I wanted to get the community's thoughts on my financing strategy. It is as follows: -Getting a $25,000 home equity loan through credit union. -$25,000 loan will be used for money down on hard money loan. -Hard money loan terms are 12% plus 4 points. Requiring 10% down. -Hard money lender will loan 70% ARV. -Hard money loan will fund acquisition and rehab costs. This is my plan to get the ball rolling on my quest to be my own boss and become a full time investor. Got to start somewhere!!!!

[Mike H.]

You're right on the money (pun intended). 

The real trick is going to be to account for that HML expense - which is a perfect analogy by Joe V in terms of how to think of that HML loan.

Its going to be extremely difficult to find deals that will have a large enough profit margin in them when including the HML fees/interest.

And if the house doesn't sell in 3 months, then your profits are going to go right over to the HML.

Still, if you can find something with the margins, then why not. Its likely going to be far cheaper than partnering with someone 50/50 on a deal.

Lets say you find a 200k house that you're going to be all in at 140k (70% ARV). Your HML charges you 4 points and 12% interest only. You sell the house in 6 mos for 200k exactly and, after closings costs and realtor fees, you make 40k of profit.

Scenario 1 with money partner - You have to give them 20k of the profits.

Scenario 2 with HML - You pay them 4 pts on the 140k loan (5600) and interest for 6 months (1400 x 6= 8,400). Total payout is 14k.

You saved 6k by using a HML over a money partner.

If the house sells in 3 months, you save yourself 9k. But if it takes a year, you end up paying the HML 22,600.

The key with using a HML to do the deal is to:
1) Get in and out quick.
2) Find a deal that has a big enough spread to pay the HML and still hit your target for profit.

What you'll have to keep in mind is that there are probably going to be other investors with all cash that will look at the HML fee as additional profit and a larger return on their money. And they are the ones that are going to be hard for you to beat on an offer.

On that same deal above, an investor with all cash could pay the 140k for purchase and rehab. Sell it and make the same 40k in 6 months. Thats a COCR of a little over 28% over 6 months. But on an annualized basis, thats actually 56%. They may not need to make that much of a return on their money to be happy so they are going to be in a position to be at 150k all in.

Makes it real tricky to compete on offers with other investors when they have the deep pockets. Not saying it can't be done. But it will be harder to flip when adding in the HML fees.

But I would still pursue it. You will find some deals that the numbers work. And when you do, you'll be tickled pink. :-)