To finance or buy outright?

Question

Good morning BP world! I have a quick question for the financing gurus on the site. I am brand new to the RE investing business and just about to begin the plunge, head first into flipping here in Atlanta. I am in a unique position as a novice to have the capital to buy my first few deals outright, without having to scrape together financing or borrowing the money. My question to you all is, would there be any benefit to financing these deals instead of buying them cash? Obviously my capital would not be tied up for several months, but is there any other benefit to financing a piece of my investment instead of paying all cash? Thank you for any and all insight you can provide. Have a great day!

Joshua D. · Answer

If you are new and have not done any deals yet, then I would suggest doing 1 deal all the way through.  This way you can see the whole picture start to finish, and learn all the little mistakes on the first deal.  You may find you hate flipping....

Therefore just pay cash to make it less complicated for you first one.  Then when you become a pro you can flip 4 or 5 houses simultaneously and look out to other sources of capital.

I have friends that have bought 3 houses with the intention to flip them and have not even started rehabbing yet 1 year later.... Don't get your self in that spot. start with one.

As we approach our second flip it looks as though we would be able to pay cash for it.  However we want to also have good cash reserves so we will be safe (a must in my opinion). Sounds like you can pay cash and still have some left over.

For flipping, we have a local bank that will lend us 15 amt loans with no payments for the first 6 months, at 5% interest. I have not found a house that they will not finance yet.  Look for this kind of lender in your area.  once its time to do 2-3 flips at a time you will have access to this great capital.

Account Closed · Answer

@Brian Tesmer,

I completely agree with the comments above.  Having that reserve to back you is gold.  Some people think borrowing funds to keep your cash liquid is a waste of profit, however if you were to get into a situation where you were able to pay the contractor or whatever crazy scenario could go wrong you would be left with your pants around your ankles.  It is always better (especially for your first flip) to have liquid funds sitting in an account while you hard money/private lend from a third source.   Plus on a positive note you will build report with a money person as you continue to grow in your flipping business.

Also make sure you stick to that LTV when vetting the deal.  Do not fudge numbers to create "profit".  It will sneak up on you at the end and not in a good way.

Best of luck to you on your first deal!!!

Account Closed · Answer

Not an expert by any means, but I think has a lot to do with your debt-to-risk tolerance. Leveraging allows you to scale your operation, but if something goes awry, you may find yourself with a lot of debt and no way of paying it back.

Rob Beland · Answer

It sounds like you are borrowing the money to purchase the flip correct? Does the loan include any money for the rehab? If you aren't paying any payments for six months I would think you could have the property sold within that six months and then what is the motivation of the bank to continue to lend you money if they aren't making any interest off of you? It sounds like a great deal for you.

Joshua D. · Answer

On second thought I bet they arn't losing money as I pay 1.5 points up front....

Joshua D. · Answer

@Rob Beland

Thanks for clarifying Rob! I have asked the bank this several times as we are getting ready to use this loan for the 3rd time... It seems odd they are willing to structure in this way, knowing I will Pay them out within 6 months.  Banker just tells me, "keep doing business with us".  I also have a buy on hold, and our primary mortgage with them as well.

At some point they will realize they are loosing money and cut me off but in the mean time...

Joe Villeneuve · Answer

When money sits still, you are losing its potential.  Money should be moving through deals all the time.

Brian Tesmer · Answer

This all seems like very sound advice. Thank you gentlemen!

Brian Tesmer · Answer

@Rob Beland Thanks so much for your speedy response and advice! That makes perfect sense.

Rob Beland · Answer

@Brian  Tesmerthe main advantage to using financing is leverage. As an example,if you have $100K you could buy one property for $100K cash or put $25K down on four properties. I'd prefer to use the leverage. Just be careful not to over extend yourself. If you're new to investing you might want to keep your debt around 65%. Also keep in mind you will need reserves set aside for capital improvements and vacancies depending if you are buying multis or single family rentals. If you're looking to get into flips on the other hand, having cash is great so you don't need to go to hard money lenders and pay crazy interest. Again, as a novice, don't get in over your head. Be sure of your numbers and keep your deals on the conservative side. Good luck.

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