Why do flippers not use their own money if they have it?

Question

I keep hearing on the podcast that house flippers always tend to use other lenders, hard money, etc... Even in J Scott's book on Flipping Houses says that they use investors and don't really use their own money.

What I want to know is why. I would think you would want to use lenders in the beginning but as soon as you have enough capital from successful flips, you use your own money and reinvest.

Trampas Tanklage · Answer

A few thoughts on hard money:

-Using a hard money loan vs straight cash can triple (or greater) your CoC ROI on a flip

-You can expand your options to higher price/ARV ranges with a greater spread

-If you have a GC you like (or are a GC and need to keep your subs busy) you can use leverage to get into a few projects at a time, which keeps your crews happy

I'm not a lender or affiliated with any. It does baffle me why some flip investors insist on only buying with their own cash.

Jo-Ann Lapin · Answer

Leverage helps you scale up. Finding loans that don’t have any pre payment penalty for a fix and flip is important .

Ryan Herting · Answer

Hey @Abigail J Steinert & @Steve Vaughan,

to answer some of your questions. When someone is an avid flipper, they usually have trusted capital partners if not a few great relationships where that pain and risk are very much reduced. Also, I would love to clear up the stigma that obtaining capital partners is painful and risky, which is in fact not the case. Just finding the right partners is difficult.

The following will elaborate on the above and answer more of your question.

See, it's an even bigger risk to have your money tied up in a deal than to pay some fees and interest on capital you are lent. Yes, you might lose out on a couple of grand here or there, but this is also a business that requires speed, and having a lot of your capital tied up in one deal will slow your scaling process.

To add, when it comes to most lenders, they will want you no have some equity in the deal. With that, you are going to need that liquid cash. If you waiting for the return/to pull that cash out from another deal, you're going to lose time and most likely money.

I hope that answers your question. I can go into more detail, but this is basically the reason.

Eric James · Answer

Well, they could be using their capital to make other purchases, for reserves, etc. Or, they could be lying about how much cash they have.

Jonathan Greene · Answer

It's all about how your money works for you. If I have a giant chunk invested and am making a 20-40% return, why would I withdraw that cash, pay capital gains on that, just to flip when I have other access to money via a line of credit or traditional financing. If you take all of your cash and use it to flip, you only have your cash and skills working on one thing at a time. If you keep you cash pumping and use smart leverage and diversify what you own, all of your money is working for you in different sectors at the same time.

Joe Villeneuve · Answer

When you use your own money, it is a cost to you,  When you use someone else's money, it is a cost to them.  You NEVER want to use your own money if you can.  Anything that comes out of your pocket, is a cost to you.  The more money you spend out of your pocket, the more expensive, and higher the cost, of the property in question.

Jim K. · Answer

Here in western Pennsylvania, I really want to meet the guy who's got five flip teams he trusts all going like the hammers of hell at the same time.

Joe Villeneuve · Answer

One step backwards to take a giant leap forwards.  Forget the percentages.  They lie.  What would the comparison be in dollars between paying all cash for a deal, and using that same money on multiple deals?

If you had $100k to work with,  3 options:

1 - Buy all cashProperty cost    $80kRehab cost         20kTotal Cost        $100kPV after Rehab $150kProfit               $50k2 - Use 70% HML = 2 pts/12% (3 properties like Option #1)Cash                 $30kHML                    70kHML Cost             10kTotal Cost        $110kPV after Rehab $150kProfit                 $40k (per property)x 3 properties   $120k profit3 - Use 70% HML = 2 pts/12% (1 properties with cash as DP)Cash                                $100kHML                   333kHML Cost                        102kTotal Cost         $535kPV after Rehab $700kProfit                               $165k

Nicholas Chapman · Answer

@Joe Villeneuve fair response, but why pay 12 percent and 2 points on money you could have used without interest?

Matthew Crivelli · Answer

Cash is King! I rather keep my money on hand if I have the ability to do so. What if something happened to the housing market or you got yourself into a bad deal? Would you want all your cash tied up? If you pay for half of the house in cash and end up foreclosing they take the whole house!

Why do flippers not use their own money if they have it?

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