Cash vs. Loan, Opinions?

Question

Looking for some thoughts on buying a flip using your own cash, versus getting a hard money loan. What do you think are the advantages/disadvantages of both, and which would you likely prefer to use. Personally, I have always been a fan of using OPM (other people's money), but is it worth the added expense if you have plenty of cash to fund it yourself? Would love to know what everyone thinks!

Ray Hage · Answer

If you have enough to self-fund, I would go that route assuming you have enough cash on hand for other expenses that could come like a car issue, health issue, etc. Let's say you have 200k in the bank and the total you'll need to invest is 150k on a fix and flip SFH. You might as well do it if the deal makes sense.

If it is a much bigger project, you could do a hard money loan if the finances make sense but HM is very expensive so why bother unless this much bigger property/deal is worth the added expenses?

Bob Stevens · Answer

Cash is king, NOT HM. You will get a better deal cash as is , close in two weeks, All my deals are just that, cash as is, NEVER any contingency. This is why I get fantastic deals.

Konstantin Ginzburg · Answer

If given the option between hard money and self-funding; I would choose to self fund. A fix and flip is generally a short term project where you ideally get your cash back when the property sells within a few months so your capital isn't tied up for a long time. A hard money loan is also typically viewed as a short term financing that should be paid back sooner rather than later due to either short amortization periods or high interest rates. Using short term financing to do a short term project would just add on one more item to your expense column in terms of financing fees and interest payments. If you have something you may need that capital for while you are doing a fix and flip, then I might consider a loan to keep personal capital in reserve but if you don't see yourself needing that capital before you sell the property than I think self-funding is the better option personally.

Sarah Hatton · Answer

If you are taking on one project at a time and have plenty of liquidity to not only cover closing and rehab, but also rehab contingency for unexpected expenses - go that route. Bring in a hml when you're ready to take on multiple projects at once and scale.

Dave Skow · Answer

@Brooks Gagnon- thanks -  great  question and lots of  differing opinions ....I think this  depends on  several variables  1) plans for the future ...buying more ...needing to rehab  etc ....2) ROR on the  funds  you can park somewhere   3)   hard money  pricing / cost / rate and  duration .....in general - as  hard money loans are normally short term loans - I would prob recomend using your own funds to get the  deal in place and then  either  refinance it  to replenish the funds  or sell the  proeprty for a gain ......if you  are able to  carry the  financing longer term   or get  more conventional financing - using OPM  might be a  better  choice - good luck

Bob Stevens · Answer

Cash always, you will get a better deal when you buy. So no interest and a better price point, win win

Mostafa Faghih · Answer

Sure, here's an example of an LBO in buying a company:

Evan Polaski · Answer

@Brooks Gagnon, as others seem to mention: cash is clearly less risky and since you have it sitting liquid, the implied nature is you don't have anywhere else to put it, anyways.  Given bank loans are in the 6% range now, you are automatically earning 6%+fees (not great, not bad) on that capital. And if the alternative was a HML where you are paying fees + 12%, you are earning a lot more on your money.

As others noted, this implies you have a healthy cushion.  I.e. if purchase is $150k, and rehab budget is $150k, I would want to have at least $350k available, as it is not too hard to blow through $50k on a major renovation.

If you are just getting into flipping, I highly recommend you use cash.  You are already taking a lot of risk with a flip, on the front end, why add to the stresses by having a recurring bill you need to pay each month, if/when the timeline ticks past the projected timeline, and further eats into your true profits.

Stephanie P. · Answer

It all depends on how much cash you have.  If you're sitting on 300K and you find a property you can buy for 275K, finance it.  If you're sitting on 3M and you find a property for 275K, buy it, renovate it and sell it to do it again.

Scott E. · Answer

I've done both, and using your own cash is way better. The only downside is that it's tough to scale your business this way (unless of course you've got millions of cash sitting around to work with)

Cash is better because you'll probably be able to get a better deal when you buy. You won't have to deal with making a big interest payment every month. You won't have to deal with the very annoying draw process 5+ times throughout your remodel. And you'll save thousands in interest (hard money rates are around 12% right now).

Cash vs. Loan, Opinions?

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