Tampa, FL · Member since 2015 · 39 posts · 0 votes
I'm in a situation where there is very little banks will give me for leveraging rental homes despite having a good amount of assets and excellent credit because I haven't had any income in 4 years (long story short: I went back to school after my previous career as a professional poker player ended due to the online poker shutdown. I have been unemployed ever since). I'm trying to turn real estate investing into a career. Since I have been unable to find a paying job, I have spent the last 8 months as an unpaid intern with a local buy and hold investor and have been soaking up as much knowledge as I can (I also just recently got my sales associate license!).
Rather than siphon off all my liquid cash into 5 year mortgages on cash flowing rental houses leaving me with nothing more to invest, I've decided the best route for me to go with is to focus on creating quicker returns through flipping. I have been focusing on houses that fit my criteria and where I have enough money in savings to buy the house and rehab it, since my assumption has been it's either that or hard money. I know the obvious disadvantages to using my own money: lower ROI, more downside risk, tying my money up for months. I still have to imagine it's better than paying major points for hard cash.
Is it common/uncommon for first time investors to use 100% of their own cash? Are there any other options I haven't considered (besides maybe asking family)?
Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
11y
@Scott Le , this post hits home for me as I just did something similar with my first flip. I used a LOT of my own money and it turned out very well for me. I am probably on the more risky side of the spectrum when it comes to investing but I made sure I didn't put all of my money in the deal and had some reserves. I also had a backup plan if the house didn't sell and the numbers worked very well as a rental. It sounds like you are in a good position to jump in as it seems like you have been spending time learning REI over the last 8 months and have your license which could help you find a good property if you haven't already. First, I have a few questions you may want to ask yourself to determine if it is a good idea. I asked myself similar questions when I decided to go for it.
Do you have enough funds to buy, rehab the property and still have a significant amount for contingencies? Don't forget about holding costs to include taxes, insurance, utilities, etc.. and closing costs on the purchase. There will always be something that comes up which you will have to go over budget to fix. If there isn't, great, but certainly plan for a contingency. You don't want to run out of money mid flip as your exit strategies will all go out the window then.
Do you have the numbers side of things down to properly analyze the deal and estimate the rehab costs? This will be needed to create a realistic budget and stay on that budget. I feel like I had done enough rehabs on my buy and hold rentals to know what the costs associated with the rehab were. I also used J Scott's book from BP to help me out when something came up that I didn't know. I recommend it as it is a good read even if you think you know everything.
Do you know the market well enough to properly calculate the ARV? This is another very important part of the deal. All of your profits could go down the drain if you estimate it too high. Be conservative here and be happy when you can list it and sell it for more. As a sales associate you should be able to do this or have an experienced agent or broker help you out.
Do you have another out if the house doesn't sell? What are your other exit strategies if the house doesn't sell or you don't hit the numbers you want? In my case, if our flip didn't sell in 2 months I was going to rent it out. Then, after 6 months or so I would do a cash out refinance into a 30 year investment home mortgage and that would have pulled out all the cash I had invested and possibly more. It would have produced a fantastic ROI and cash flow if that is what happened. This is because the numbers worked and I looked at that from the start, not at the end when it didn't sell. This may or may not be an option for you since you don't have W-2 income like I do. So, in your case make sure you analyze your exit strategies and ensure they work in your particular situation and the deal you are looking at.
Do you or will you need this money for anything over the next year or so? From start to finish the flip could take anywhere from one month to 3-4 months depending on your scope of work. After that, it could sit on the market for a few months and not sell. If your backup plan is to rent it out and refinance, it could take at least 6 more months of rental income before you can refi and cash out. This means it could be over a year before you see that money again. Plan for that and if you need the cash in that time, you have no liquidity in the deal and I would say it is a no go.
I'm sure there are plenty of other things I am missing but this post is already long enough and I will let others add to or argue what I have suggested.
Good luck and I hope the answers to these questions are positive and you go for it. I really enjoyed it and will do more in the future, although I like the passive income of rentals more.
Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
11y
@Scott Le , this post hits home for me as I just did something similar with my first flip. I used a LOT of my own money and it turned out very well for me. I am probably on the more risky side of the spectrum when it comes to investing but I made sure I didn't put all of my money in the deal and had some reserves. I also had a backup plan if the house didn't sell and the numbers worked very well as a rental. It sounds like you are in a good position to jump in as it seems like you have been spending time learning REI over the last 8 months and have your license which could help you find a good property if you haven't already. First, I have a few questions you may want to ask yourself to determine if it is a good idea. I asked myself similar questions when I decided to go for it.
Do you have enough funds to buy, rehab the property and still have a significant amount for contingencies? Don't forget about holding costs to include taxes, insurance, utilities, etc.. and closing costs on the purchase. There will always be something that comes up which you will have to go over budget to fix. If there isn't, great, but certainly plan for a contingency. You don't want to run out of money mid flip as your exit strategies will all go out the window then.
Do you have the numbers side of things down to properly analyze the deal and estimate the rehab costs? This will be needed to create a realistic budget and stay on that budget. I feel like I had done enough rehabs on my buy and hold rentals to know what the costs associated with the rehab were. I also used J Scott's book from BP to help me out when something came up that I didn't know. I recommend it as it is a good read even if you think you know everything.
Do you know the market well enough to properly calculate the ARV? This is another very important part of the deal. All of your profits could go down the drain if you estimate it too high. Be conservative here and be happy when you can list it and sell it for more. As a sales associate you should be able to do this or have an experienced agent or broker help you out.
Do you have another out if the house doesn't sell? What are your other exit strategies if the house doesn't sell or you don't hit the numbers you want? In my case, if our flip didn't sell in 2 months I was going to rent it out. Then, after 6 months or so I would do a cash out refinance into a 30 year investment home mortgage and that would have pulled out all the cash I had invested and possibly more. It would have produced a fantastic ROI and cash flow if that is what happened. This is because the numbers worked and I looked at that from the start, not at the end when it didn't sell. This may or may not be an option for you since you don't have W-2 income like I do. So, in your case make sure you analyze your exit strategies and ensure they work in your particular situation and the deal you are looking at.
Do you or will you need this money for anything over the next year or so? From start to finish the flip could take anywhere from one month to 3-4 months depending on your scope of work. After that, it could sit on the market for a few months and not sell. If your backup plan is to rent it out and refinance, it could take at least 6 more months of rental income before you can refi and cash out. This means it could be over a year before you see that money again. Plan for that and if you need the cash in that time, you have no liquidity in the deal and I would say it is a no go.
I'm sure there are plenty of other things I am missing but this post is already long enough and I will let others add to or argue what I have suggested.
Good luck and I hope the answers to these questions are positive and you go for it. I really enjoyed it and will do more in the future, although I like the passive income of rentals more.
Investor · Waynesville, NC · Member since 2014 · 408 posts · 121 votes
11y
I have gone all in with my savings in the past, and it has always worked out well for me. BUT, you have to make sure you have to estimate very conservatively. You have very little room for error on a flip, so be sure to get an accurate estimate of ARV, rehab cost/time and days on market. Any one of these will kill the deal. I would suggest getting a property under contract and then getting as many second opinions on all of the above as possible.
Also, be sure to leave yourself some emergency funds in savings for your personal life. You never now when you may get sick or injured and will need some funds to carry you through.
Urbana, IL · Member since 2012 · 1k+ posts · 425 votes
11y
I think it depends on how much you can handle at once. If you're going to flip one property at a time and you're 110% sure you can sell it at the price you want in the time frame you want go ahead and use your money. Of cousre listen to what the others above have said.
If you want to tackle 2 or 3 at a time you will probably want to borrow that money paying those high points. HMLs are there to loan you the money at high points so you can keep your cash on hand for other deals. Don't want to pay points on hard money? Go to home depot and get a home depot card. They carry financing for 6 months to a year on purchases over $299 or something. If you end up returning certain products because you found the toilet didn't work you return it and they send a check in the mail. Its free hard money. We had one purchase of roughly 10k in supplies and materials. Maybe not the cheapest products you can find but cheapest borrowed money.
Real Estate Investor · Raleigh, NC · Member since 2011 · 142 posts · 39 votes
11y
@Scott Le A good way to tell if your deal is good or not is by using Hard Money loans in your figures if you can't afford to do the deal with Hard Money Loan it's probably not a good one to do with your own cash. If you can turn it fast the points and interest are not a big deal. Good luck to you!
Flipper/Rehabber · Fishers, IN · Member since 2014 · 71 posts · 47 votes
11y
Don't use hard money. I know poker players so risk is not something that you're opposed to. You can always discount the property and sell. If you need money later THEN you use hard money, you won't need as much so cost will be cheaper. I have done several deals with poker player in Indianapolis both as partners and investors. Hope your still playing successfully. Good Luck Dave Short
@Scott Le , this post hits home for me as I just did something similar with my first flip. I used a LOT of my own money and it turned out very well for me. I am probably on the more risky side of the spectrum when it comes to investing but I made sure I didn't put all of my money in the deal and had some reserves. I also had a backup plan if the house didn't sell and the numbers worked very well as a rental. It sounds like you are in a good position to jump in as it seems like you have been spending time learning REI over the last 8 months and have your license which could help you find a good property if you haven't already. First, I have a few questions you may want to ask yourself to determine if it is a good idea. I asked myself similar questions when I decided to go for it.
Do you have enough funds to buy, rehab the property and still have a significant amount for contingencies?
Do you have the numbers side of things down to properly analyze the deal and estimate the rehab costs?
Do you know the market well enough to properly calculate the ARV?
Do you have another out if the house doesn't sell? What are your other exit strategies if the house doesn't sell or you don't hit the numbers you want?
Do you or will you need this money for anything over the next year or so? From start to finish the flip could take anywhere from one month to 3-4 months depending on your scope of work.
Hi Bill. Thanks for the long thoughtful response. We definitely sound very similar in our risk tolerance (and judging my your company name you may also have a background in "gambling"). To answer your questions (and everyone else's since many of you echoed similar sentiments):
1. Yes, I do have the funds ready to go, although of the 2 houses I have offers on right now, 1 would be a lot more comfortable than the other even if it provides less of a return (one I have projected for $67k AIC and the other is projected for $107k). I could always cash out some mutual funds I have if I needed more money, and I probably could also consider contacting a relative to see about a loan. I mean I probably could do that from the onset, but there's that prideful part of me that wants to do this on my own and not have to "beg" for money. And yes, my models account for all closing costs, sales commissions, holding costs, and expect 4 months average hold time.
2. I feel fairly comfortable with the rehab budgets and fixed cost calculations I have in my model, even if I've never actually managed a rehab before. I've walked through 100 houses with my mentor and watched him just spit out costs of things like a computer. I made sure to run my lists by him for an estimate, and then added 10% for good measure. I really wanted to make sure I was conservative with my 1st deal, which is why I have only made a handful of offers over the last few months because I wanted to bet conservatively and yet still feel like I had cushion to be wrong.
3. I will honestly say that the thing I'm least comfortable with is ARV, since I have had to teach that to myself. My broker is a commercial broker, so the residential stuff has been a self-learning process. I spend considerable time everyday on MLS, and feel I have a decent understanding of CMAs. I also think my expectations for both houses are WAY on the conservative side. I am not shooting for high end comps, and I made sure to use 97% of my expected listing price in my model when analyzing my numbers. It probably isn't the worst idea to see if I can find another realtor to take a look and see if they are in the same ballpark as me.
4. On the house that was 67k AIC, I know the rental market in that neighborhood very well and know if it didn't sell for my price, I could rent it at a nice 9.5% cap rate. I could then rent it until I needed my money back for another flip, and then either sell it to my mentor's fund who I know 100% will buy it or consider going to a bank (who probably would only give me 50% LTV if it's cash flowing).
On the more expensive house, my backup out is a little more cloudy since I'm not too familiar with the rents in this neighborhood. I think I can get at least an 8.5% cap on that, but I'd be far less comfortable tying up the money it would take on this one as a rental as I would be on the first. That said, the spread on this one is way bigger than the 1st and I'm far more confident I can get top dollar in this neighborhood than the 1st. So realistically even if don't get my exact selling price, I have a very hard time imagining ever losing money in selling this one as long as I don't torpedo past my budget.
5. Like I said, I am using 4 months as an average hold time in my model, so I think I am being very realistic with my approximations.
Long post, but I find it helps to write out all my thoughts and see if they make sense. If anything I wrote sounds too looney, please let me know! I am glad to hear financing your own deal worked out well for you and @Austin_Lee. Gives me a lot more hope.
Don't use hard money. I know poker players so risk is not something that you're opposed to. You can always discount the property and sell. If you need money later THEN you use hard money, you won't need as much so cost will be cheaper. I have done several deals with poker player in Indianapolis both as partners and investors. Hope your still playing successfully. Good Luck Dave Short
I am on the same page with you there. I really didn't want to seek hard money unless I absolutely needed to later. I haven't spoken to any relatives of mine, but I do have some wealthy uncles who might consider giving me a "family discount" on hard money. That said, I feel if I have the funds right now and am only planning to do 1 project at a time (for now), then it probably just makes more sense to not pay any interest unless I had to.
On a side note, it's great to hear there's another online poker alumni translating his skills to the real estate market. Corporate America wants NOTHING to do with poker players (in my experience), so I always like to hear other poker players succeeding in other avenues. Thanks for the advice.
Investor / Wholesaler · Nashville, TN · Member since 2014 · 1k+ posts · 667 votes
11y
@Scott Le I didn't expect you to answer the questions in the post but it is probably good that you did so others can pick them apart (if they are so inclined). Here is my 2 cents but realize I have done one of these so am by no means an expert.
I would recommend planning for at least 6 months of holding costs and be pleased if it is less. I planned for 6 and got it closed in under 3, obviously I was happy with the extra return.
I wouldn't bank on 97% of your list price. I would have an ARV that is what I will be selling it for. List it as needed to get it sold for that number. Sounds like you are being conservative here so that is good.
Do not go into your mutual funds or other retirement savings. I would rather use someone else's money than tap into my retirement accounts. I have taken a TSP loan in the past for real estate but it was only the bond portion of my portfolio and I pay myself interest in that situation so it was a win-win. Taking money out of your mutual fund means it may never make it back there.
REI is a gamble too so you are used to that, calculate everything and run the numbers just like you do in your poker hands. You are probably even better at that being an online poker guy. Blackjack RE is certainly owned by a gambler.... I wish you good luck and keep me updated on how you get on. -Bill
Herndon, VA · Member since 2014 · 1k+ posts · 324 votes
11y
For using 100% cash, as long as you have reserves is fine.
Make sure your calculations in your analysis give you a return for your funds. That way if you have success, you can scale up and use HML without having to make drastic changes.
Real Estate Investor · Prince Geroge's County, MD · Member since 2012 · 392 posts · 104 votes
11y
I don't think there is an issue with it however you should do your due diligence to make sure this is a good deal and that it is bought in the right area. Run your numbers, check your comps and then do it 3-4 more times. You don't want to tie up your savings in a bad deal that takes 12-18 months to get out of or go $50k over budget from not doing proper due diligence.
Real Estate Investor · Los Gatos, CA · Member since 2014 · 226 posts · 89 votes
11y
@Scott Le
Investing is a team sport, with that in mind, I suggest to find 1-2 friends that are as liquid as you are and band together to fund this deal and flip it. It's not uncommon to keep a "carry", that is, a premium for you finding and executing the deal. The carry applies to the profit and it means you get first cut, then the rest is split equal. Example: carry is 20%, you sell the property for 500k, your net profit is 100k, you take first 20k, then the rest of 80k is split 3 ways with you other 2 friends.
Regardless how you structure this deal, you must, I insist, you must know for sure you will have a buyer for the home even before it's rehabbed. You should market it under the normal market price to sell it instantly. Work with local realtors, they should know you grabbed a deal and will be back on the market so they should ready their buyers.
When flipping, you calculate what's called the Velocity of your cash. You want that velocity to be high. Assume 30 day closing from Pending status, probably 2 mo to rehab it. 90 day Cash velocity is not uncommon.
Tampa, FL · Member since 2015 · 39 posts · 0 votes
11y
Originally posted by @William Allen:
@Scott Le
Give us an update on what came of these...
Hi William. I closed on my first house with all cash 10 days ago (and given that I was the agent, it was also my first official closing). I about-faced and decided I had enough money to buy & hold one house while still being able to go flip another, even without access to a mortgage. So the plan is to rent this one.
Unfortunately, nothing has gone right since closing. The house needs a new roof and it needs to be rebuilt on a pitch since it was a crummy old flat roof. I have been extraordinarily frustrated by the roofers in this area. I've called 12 companies, of which 7 never returned my call, 4 made an appointment for a bid but never showed up (including one company that outright lied to my face that they were there at the same time I was), and the 1 showed up but bid twice my budget. So basically nothing has happened to the house in these 10 days, I have no bids scheduled until next week (assuming any of these guys actually show up), and I don't want to start anything else until the roof is done.
I suppose you can say I'm learning some valuable lessons about subcontractors the hard way. That said, I have no idea what to do about the roof if I can't get anyone to come bid on it!
Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
11y
@Scott Le I've used a HELOC, so essentially the same as my own money. Until you have the whole process down to a science, using your own money is the safest way to go. Hard money will add 10% to the cost of a deal. That is 10% more you need to be sure you'll cover. You have a lot more margin with your own money. And you are not going to want to do multiple deals at once anyway until you know what you are doing.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
11y
@Scott LeJust came across this thread for the first time - it now reads like a diary. I really liked the reply by @William Allen - and on the surface it now looks like you didn't properly account for everything he suggested. My initial response to your post at the time would have been: who told you "the obvious disadvantages to using my own money: lower ROI"...? I would say that in the case of buying-to-flip, that should NOT be the case, because simply put, in every circumstance where you have to borrow money (short-term) at a higher interest rate than you are getting on your own savings, it would PAY YOU to use your own Cash (regardless of whether the flip ended up being as successful as you hoped)! Would you agree? The thing about using your own cash is that you are (or, should be) MORE LIKELY to be extra careful with the math? (Did you find that to be the case, during your heady years on the circuit)?
Congrats on taking action! Looking forward to your next Roofing saga entry - hopefully it will be positive. All the best...
First let me say congratulations on your first closing.
As for the roof and the contractors, that is certainly going to happen but I wouldn't have expected it to be that bad. Do you have any other contractor contacts in the area that you trust and know do good work? If so, I recommend contacting them for a roofer referral. You may have already done this and if so, I'm at a bit of a loss other than asking some Tampa folks on here who they use.
One thing that I found is that if you find the one guy who does great work at a great price, hit him up for other people he works with. I have an HVAC guy here who has sent me 3 different referrals this week, electrician, septic, and handyman. These contacts have saved me a ton of money and would have been very hard to find on my own. They are licensed guys who do great work but they aren't good at marketing and getting their names out there. Just good old local boys who get business via referrals.
Good luck and I wish you the best of luck. Keep us updated.
First let me say congratulations on your first closing.
As for the roof and the contractors, that is certainly going to happen but I wouldn't have expected it to be that bad. Do you have any other contractor contacts in the area that you trust and know do good work? If so, I recommend contacting them for a roofer referral. You may have already done this and if so, I'm at a bit of a loss other than asking some Tampa folks on here who they use.
One thing that I found is that if you find the one guy who does great work at a great price, hit him up for other people he works with. I have an HVAC guy here who has sent me 3 different referrals this week, electrician, septic, and handyman. These contacts have saved me a ton of money and would have been very hard to find on my own. They are licensed guys who do great work but they aren't good at marketing and getting their names out there. Just good old local boys who get business via referrals.
Good luck and I wish you the best of luck. Keep us updated.
I asked my REI mentor (who owns 30 houses in the area and co-owns a subcontracting firm) for roofing contacts. Of the 3 he gave me, 2 of them didn't return my call and 1 no-showed an appointment.
It's been really shocking how horrible this has gone so far. I find it so hard to fathom that not one roofer in this area is interested in a paying job. I've called 6 more firms today. 2 of them I left unreturned voicemails for, 3 of them said "we'll call you back", and another is able to come out for a bid...in 9 days (if they even show up).
My mentor's firm is going to handle a lot of the other tasks for the house, but like I said everything is logjammed by waiting for this roof. I'd be getting cleaned out if I actually used hard money on this.
As a form of catharsis this morning, I made sure to leave scathing reviews on every single roofer who no-showed's Angie's List page (god knows I have enough free time on my hands with the house just sitting idle).
I was going to mention that I use Angie's List as well, more to find people to contact as I find most people leave reviews when they are pissed off or really happy and not when they just have a good experience. Referrals that I have gotten from other investors haven't panned out very well for me either, they either don't call me back or call me back weeks later. I was in a similar situation this winter with my bathroom reno, I just ended up doing it myself because no one wanted to get paid around the holidays. One other idea could be to go straight to a GC just for the roof, you will end up paying his cut but you may get a better quote overall or one similar since he may get a better rate than you.
One good thing about using your own money is that the holding costs go down and allow for an easier timeline. But, it sounds like you are still pushing to get it done quickly which is important.
I was going to mention that I use Angie's List as well, more to find people to contact as I find most people leave reviews when they are pissed off or really happy and not when they just have a good experience. Referrals that I have gotten from other investors haven't panned out very well for me either, they either don't call me back or call me back weeks later. I was in a similar situation this winter with my bathroom reno, I just ended up doing it myself because no one wanted to get paid around the holidays. One other idea could be to go straight to a GC just for the roof, you will end up paying his cut but you may get a better quote overall or one similar since he may get a better rate than you.
One good thing about using your own money is that the holding costs go down and allow for an easier timeline. But, it sounds like you are still pushing to get it done quickly which is important.
Holding costs definitely down but still existent so 2 weeks idle does still hurt.
Got another 2 bids on my roof today for 7350 and 9600. Original budget was 4k but then I discovered the only way to fix the flat roof was through an expensive TPO tapering system. If I can find someone licensed to do it for 6k at this point, I think I have to jump on it. Just going to have to cut some other small cosmetic items I wanted to accomplish. I have an unlicensed bid for 6k fwiw (also get no warranty on that but he does have references).