Should I Take a Personal Loan to Fund a Flip?

Question

I'm looking at using a HML to fund a flip. To do that, many of these places want 10% down to fund a deal. I'm looking at a PML pr someone I know more personally to help out, but most people I know see those flipping TV shows and think this is all just silly! I'm also looking into the possibility of partnering with someone, but that has it's own challenges too. So, as another option, I'm considering a personal loan! My credit is good enough, I could probably get a loan like this to fund that HML gap, but is it a good idea? Their rates are similar to that of a HML so I don't see much difference there, but BP is good at pointing out things I'm missing.. so tell me, what's wrong with doing a personal loan to help fund a flip? What's your experience with this??

Rob Beeman · Answer

@Tim Crosby    Tim, the reason that the rehab lenders want you to have funds in the deal, and sufficient funds to start the project, as well as a way of paying the interest while rehabbing, is that they want you to be successful. It's not a fluke that the major reason for most businesses that fail is due to lack of liquidity ( even real estate investing businesses). The lender fears that if the borrower can't complete the rehab, or refinance, then they might be stuck with a partially completed project to foreclose on.  Most rehab lenders ARE NOT rehabbers.  They do not want an unfinished project as an REO.

Sounds like you have done your homework, however it also sounds like you are also short on funds to cover the portions that the lender doesn't (as well as start the rehab). Perhaps you should seriously consider searching out a local person that has cash to insert, but no time, flipping experience or desire to oversee contractors and the entire process of the flip project. You might locate a person to cover all of the costs associated with the flip, or maybe someone who only has the funds to cover the parts that a rehab lender doesn't , and make that person your partner (a member of the LLC).

I have successfully done this in the past. In fact, more than once ...............too successfully. As the person with the cash ultimately chose to do flips themselves.  Figured they didn't need my expertise.  They were wrong. In each case they fell on their face............people get greedy. Bottom line, do not go into a flip strapped for cash. You will discover stuff during the flip that might require MORE cash, and if you are that tight from the gate, it will not be a comfortable situation.

Jaysen Medhurst · Answer

Make the offer, @Tim Crosby. No better motivator than having a viable deal on the hook. It's easy to use "I don't have the financing lined up" as an excuse not to take action.

Jaysen Medhurst · Answer

@Tim Crosby, well you're obviously taking on more risk. If things go bad, you're going to be on the hood for the personal loan, no matter what happens with the property.

It certainly might work, but if you're just scrapping by and then the flip goes South, you could be in a world of hurt. How confident are you in this flip?

Tim Crosby · Answer

@Jaysen Medhurst lol I know what you're getting at. It's not that I'm not motivated, but if I don't have a way to get $10k, I can't just make an offer for $80k on a property that needs $25k in rehab. I could. They might accept that. Then I'm in a position where I'm racing to find funding and the longer I have it on contract, the more likely I am to fund it in a way that's less desirable. I'm okay doing that once I have something to contribute, then the rest is easy. A lot of these HMLs want me to pay put of pocket for the rehab and be reimbursed after the work is completed. If I cant do that, why put myself in a position to piss everyone else in the deal off when I can line up that option and move with confidence!

Tim Crosby · Answer

Hey @Jaysen Medhurst! Yeah, I'm actually looking at that risk as a positive, motivating factor. I'm already analyzing deals from every possible angle, so this just makes that even more intense! I go overboard on everything when it comes to estimating costs. I over estimate expenses and under estimate profits, just to be extra safe. This might mean that the offers I make will be denied more often than someone more lenient, but it provides me more confidence in the deal overall. So to answer your question, I'm pretty confident in my numbers when I set an offer price, but I'm hesitant in putting forward that offer without first lining up the funding. I'd rather line all that up ahead of time and pull the trigger when the time is right, rather than putting together that offer and scrambling to get the job done.

Should I Take a Personal Loan to Fund a Flip?

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