Lines of Credit to fix-n-flip (2016)

[Duriel Taylor]

Hello BP Family,

Happy Sunday and I hope all is well. What would be your advice to someone that is interested in using lines of credit to start a fix-n-flip business? Here is my mindset on how the LOC process starts, how I would evaluate a property and how I would fund said property(project).

*I get approved for 150k, LOC

*find a property for sale at 80k

*rehab needed 10k

*resell value will be 210k

*it will take 2-3 months to rehab thus i will use the reminding funds from 90k (all in) minus 150k equals 60k.

*the flat fee for the LOC is 5k and there is a processing fee of 2k

*lets say I pull out all the funds available just in case I need to cover an expense I did not see coming and the monthly payment, total repayment is 157k

*then i sale the property for 210k minus the total amount invested 157k profits is 53k.

This is how i understand the LOC process and pay back. What would be your thoughts and your feedback? I look forward to hearing from you soon.

Regards,

[Kyle J.]

Hey @Duriel Taylor,

The first thing that jumps out at me is the cost of that LOC. $7k sounds very expensive. What kind of LOC is it (i.e. secured, unsecured) and do you know for sure it's legit? Just based on what you posted, my concern is that some unscrupulous lender might try to get you to pay the $2k "processing fee" and/or the $5k "flat fee" (whatever that is) up front, and then just take off with your money and never fund the LOC.

A few other quick thoughts as I read what you posted:

- What are the terms of the LOC? Does it require regular monthly payments or is it all paid back in a lump sum at the end of some pre-determined term? If it requires regular monthly payments, is it interest only or a combination of principal and interest? Also, if it's regular monthly payments, do you have a plan for how you'll make the payments before the house sells?

- And how much is the interest rate?  Your "total repayment" number of $157k doesn't seem to include any interest.  Sounds like it only accounts for the $150k you'd pull out and the $7k in fees.  So, unless it's free money (probably not), you need to add in the cost of the interest you'd have to pay.

- Make sure your rehab numbers are correct. $10k sounds pretty cheap to get an $80k property to an ARV of $210k, and 2-3 months sounds too long to do a $10k rehab. (Side note: @J Scott wrote a couple good books on flipping houses and estimating rehab costs that might be worthwhile for you to check out here: http://get.biggerpockets.com/flippingbook/.) 

- You're missing a lot of other number in your total projected profit number. You say that your projected profit is $53k, which you figured based on a $210k sales price minus your $157k LOC payback. But what about Realtor fees, ongoing holding costs during the rehab and until it sells (like utilities, insurance, etc), interest on the LOC, taxes, etc. There's really too many things to list, but you need to take these things into account.

Ultimately, I just don't want to see you get ripped off, so the first thing I'd do is inquire more into the LOC. If it turns out to be legit, then you can worry about the other stuff I mentioned.

Good luck to you.