With properties sitting longer, has that changed how you finance?

Question

Good morning BP,Obviously, as everyone knows interest rates have risen and properties are sitting on the market longer than they used to, at least in my market. I know a lot of investors on here take full advantage of hard money loans. Hard money is a great option if you are able to get in and out of the property quickly without tying up your own capital. Another great thing about hard money is that you are able to diversify your risk into multiple properties instead of putting all your cash into one property. But the key is to be out of the property as soon as possible to avoid the interest payments, some interest payments can be pretty hefty. With all of that being said, since properties are sitting longer after renovations has this changed how you finance your deals? Are you looking for the private money route? Are you saving your cash and doing deals that way? Or has nothing changed at all for you?

Jamie Dietz · Answer

As a private (Hard Money) lender here in Pittsburgh I agree that you have to have a clear and realistic exit plan. Lately, I have been coaching borrowers to make sure they build a budget with enough carrying costs to cover at least a couple months DOM. If the deal doesn't pencil with a few extra months of interest you need to negotiate a better purchase price.

Evan Polaski · Answer

Has my financing changed, when I do a flip? No. I still use cash.But I would argue with the paradigm that deals are sitting longer. A generic flip in a marginal area will sit longer. A unique product in a good area is still going into multiples within days.So like Joel and Scott note, if a deal is sitting it is because it is a crap product with too thin of margins.

Joel Owens · Answer

I am not in residential but commercial. Whatever you invest in you want the RISK low as possible and UPSIDE as high as possible.That is why I do not invest in marginal, good, or thin deals hoping for the best just to buy something.Instead I wait for the great to amazing deals so even if it doesn't turn out as planned typically still make money and do well.If I was in residential I would base the renovated exit value at the bottom 50% of sold comps in last 30 days or below. IF the last 6 months trends showed massive decline month over month then current months solds would net help either. You would need to project way lower exit value. Time kills deals. One day your property is the best on the market and the next it could be middle of the pack. So speed, buyer urgency, the right price out of the gate is critical for success.You have to ask yourself if the deal is in a falling area you might not want to buy it at all to rehab or you might want just wholesale it and let someone else take the risk and save your capital for fatter deals in better performing areas.

Scott E. · Answer

Private money isn't far off from hard money rates at this point. Private money investors can make like 5.5% in treasuries right now. WSJ prime rate is 8.5%. I've been paying between 8-12% on my money for a while. In the grand scheme of things, where rates are at have not changed my strategy at all.If a deal made sense borrowing at 8%, it's still going to make sense borrowing at 12%. On an average $500,000 flip out here we're talking about an extra ~$10k-$12k in total interest on the deal borrowing at 12% compared to 8%. That sucks but it doesn't make or break the deal.

Jeremy Taggart · Answer

@Katlynn Teague I think it depends on the price point, property type, and market. Like here in Pittsburgh stuff under the median price point in good areas still moves quick, despite rates increasing. If I was flipping a property above the median price point that's where I would probably budget for a potentially longer hold time. Although I likely wouldn't get into that type of project in the first place right now if I had doubts on moving it after the rehab anyhow. I am a proponent of utilizing other people's money to help scale quicker, but doing it properly without getting out of hand. Still making sure I have reserves and liquid cash if needed of my own despite using mostly OPM. Always a good practice regardless of what the market is doing.

Mike Klarman · Answer

One of the things I do is look up markets where rehabbed properties in B or better neighborhoods do not sit for more than a month. My team just finished a rehab in the suburbs of Pittsburgh in a B+ neighborhood for an investor of mine, we listed Aug 23 and were under contract Sept 6th. Deal closes Oct 10th.When an agent brings me a viable project, the first things I discuss with them is the exit plan. I need an exit plan before getting anyone involved. I need to see metrics on avg days on market and need the agent to be confident that the property will be under contract within 30 days. Obviously we are heading into the slow time of real estate sales here in NOV and DEC and JAN where the avg days on market may go to 60. But I make my agents sell me on how the exit is what they say it will be cause the Hard Money loans get more expensive as you get deeper into the project and once the project is completed the investor is full drawn out and paying interest on the whole loan amount. That's when holding costs can start putting a dent into profits. The right market, the right team, the right project, in the right area usually can get sold in 30 days or less.

Katlynn Teague · Answer

Absolutely agree!