Any advice on a home improvement loan for my first flip ?

Question

HI My sister and I are geared up to dive into property investment with a fix-and-flip project in Ohio. We've diligently saved money and secured a loan to kickstart our venture. However, we're eager to explore ways to maintain cash liquidity while embarking on renovations. Considering this, I'm contemplating whether seeking a home improvement loan is a sound strategy to minimize out-of-pocket expenses. I'd appreciate insights and advice from the community on the best approach to initiate our investment journey in real estate, maximizing our resources while ensuring a successful fix-and-flip endeavor in Ohio."

Nick Belsky · Answer

@Astasia Drysdale

Fix and Flip loans can be very useful for getting started or even growing your business.  Many flippers use them as they will often allow greater flexibility in terms of down payments and funding rehab costs.  Even with no experience, some lenders can offer up to 90% financing on the purchase price and 100% of the rehab budget.  That leaves only 10% down plus closing costs to come out of pocket.  These type of loans can help keep you liquid while moving through your projects.

However, they are bridge loans and come at a cost and with risks.  Most experienced investors do not pay too much attention to the rate on fix and flip loans.  These loans are designed to get in and get out quickly.  A few higher points on rate over 3-6 months does not usually impact the profitability by enough to be a major factor.  Obviously, on higher loan amounts, the impact would be more significant.  If you are looking at a larger project that may take closer to a year to complete and exit, then rate is certainly more impactful.

If you plan the sell, the risks are a bit softer in terms of you making your margins.  There will be no refinance charges or worry about getting renters in right away.  Some investors prefer to buy rentals vacant so they can screen their own tenants versus inheriting a potentially troublesome tenant that they had no hand in choosing.  Yes, the appraisal may come in lower than what you hoped to sell for, but even so, you'll be able to more likely recoup your initial investment, cover your costs, and still walk away with some profit.

If you plan to rent and hold, there is a bit more risk involved.  Many like to use DSCR loans to refinance into permanent financing at a lower rate.  DSCR is dependent upon rental income, principal and interest payment, insurance costs, property taxes, and HOA fees (if applicable).  If vacant at refi, most lenders will allow use of the 1007 to determine the fair market rent and use that figure for the DSCR calculation.  This can come in higher or lower than what you projected.  Lower means your cash flow figures may not be enough for the 75 or even 80 percent cash out you were planning on to make your money back.  Appraisals are starting to come in lower in many markets around the country showing softening markets.  However, many are still very bullish.  If the appraisal value or Fair Market Rent is low and you don't cash flow enough, you may have to bring more cash to close in order to qualify for the loan.  Conventional financing overcomes most of these issues but also present several other challenges for many flippers.

That 10% down can be great, depending on the exit strategy, or risky.  If you are working in a market that fix to hold is a bit iffy, putting more than 10%  down can help you mitigate a bit easier at exit to perm and put more back in your pocket at closing, if selling.  Each investor has to weight the risks and rewards to see how much risk they are willing to take on.  Liquidity is everything in this game, so finding a strategy or blend of strategies that support that is usually the best way to go.

Hope that offers some insight for you.

Cheers!

Mathew Pezon · Answer

Hi there,

Kudos to you and your sister for saving up and securing financing to start your fix-and-flip journey in Ohio! That's an exciting first step.

Regarding your question about home improvement loans – I would initially caution against taking on too much additional debt upfront. However, utilizing a hard money lender is an option to consider if you need extra capital for your first few flips.

The main pros of hard money lenders are that they can fund projects very quickly and have more flexible qualifying guidelines than banks. The biggest con is that their interest rates and fees are much higher.

I'd recommend starting with a smaller scale flip using your current budget. This will allow you to test the rehab process without overextending. Once you complete your first successful flip, you can either reinvest the profits into the next project or potentially utilize a hard money lender for additional funding.

The key is keeping overhead and interest costs in check, even with hard money lending. Scope projects conservatively, watch contractor budgets, and focus on necessities over luxuries in the remodel.

By scaling up gradually and keeping a close eye on your numbers, you can successfully utilize hard money lending without taking on excessive risk or debt. Just be cautious and strategic in order to maximize returns.

Let me know if you have any other questions! Wishing you both the best as you embark on your first flip.

Mike Klarman · Answer

So it sounds like you may have gotten a loan from family/friends and you are asking how to leverage that money so you get can financed on RE investments?

So, without knowing the exact number you are working with, I'd say start small and it sounds like you are as Ohio is full of those areas where you can buy for less than 100k.  That's good.

A project, even in the lower buy-box markets, will require 20k - 25k in liquidity to see it through its lifecycle.  You're talking about funding the down payment, closing costs, holding costs, unforeseen costs, and to get a contractor started on your project you'll have to hand them 10k at least because rehab funds are only released after the work has been inspected during a draw process.  You'll need to lay this 10k out during the life of the rehab and then get it back minus the draw fees upon completion.

From a financial standpoint, you're best plan of action at the start of the journey is make short term cash and pay the loan back asap.  When you have enough cash as to where you can afford to leave 5k - 15k in deals after the refi and still have that not hurt your purchasing power then you are ready to start acquiring consistently but all the while still flipping to generate income too.  You'll take a tax hit on the short term gains but money will be coming in that will help fund the growth.  Best case scenario you get your capital back in a refi, but lately I have to tell you, appraisals are coming in 20% lighter than they were even 6 months ago.

For example, I know someone right now in a project that received an ARV of 175k on the bridge appraisal.  So now, the 90 days seasoning and rehab is done is and he wants to do a refi and hold it.  Another appraisal is ordered and that one came in 160k.  He lost 15k in value over the 90 days and so now he'll be lucky to only have to put a few grand in at the refi table.

So that's why I say, at the beginning of the journey - if capital is an issue or you are on a HELOC or borrowed money - liquidate.  Your #1 move at the start is make money and you can't afford to be screwed during the refi process and not get your money back cause then you are stuck in one property that doesn't even cash flow well and you have 0 dollars for deal #2.

Small, fast projects, not giant profit margins, price to sell and make your 20k - 25k and keep it moving.  Do that 3x.  Stay in the game and pay off the loan and from there scale and start to build the portfolio with the 2 - 4 unit buildings.  Those are the cashflow pieces.  I've done dozens and dozens of deals for people that were 2 - 4 unit properties and they ALL cash flowed very well, whereas most SFH DSCR loans struggle to meet min requirements to get max terms.

Patrick Drury · Answer

@Astasia DrysdaleWhat market in Ohio are you located in?

Astasia Drysdale · Answer

"Thanks so much everyone for the advice on loans for my first flip! Really appreciate the help!"

Remington Lyman · Answer

Are you guys local to Ohio?

Bill J Fay · Answer

BP has a section under "Build your Team" called Hard Money Lenders. These are vetted and recommended by BP.

Eliott Elias · Answer

Hard money is your best bet to be as little out of pocket as possible on a project you are acquiring that needs rehab. The max loan to cost you will find is 90%. Beware, these are high interest-rate and short term loans.

Scott E. · Answer

Google "hard money lenders near me" and call 3-4 of them that have the best reviews.

Sounds like you have cash so that's going to help your case as a new investor. You'll probably find somebody who is willing to lend you ~50% of the purchase and 100% of the rehab. Rates are high, but you can afford the leverage if you buy right.

Any advice on a home improvement loan for my first flip ?

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