What collateral do cash investors have?

Question

I am about to start flipping (rehabbing). I am capable of rehabbing one house at a time with my own financing. If I am ever going to do more than 1 at a time, I will need investors.

I suppose I could offer a cash investor 12% APR or something like that. If my plans work out, I will get a few profitable rehabs under my belt, then start looking for cash investors. My question is.... what assurance do these investors have if things don't do as planned? If I can't give them 12% return on their investment, what will happen? Let's say the local market crashes and I can't sell the house for as much as I had planned. What then? Then, I'm in debt to them. I don't think I would give them the house because I would still need to sell it for as much as I could, leaving me with nothing to give the investor.

Manolo D. · Answer

Patrick Philip You can ask yourself this, will you give me your money and i'll do my first flip, it goes good i'll give you 12%, if it goes down the drain I'll write you a nice sorry letter in a scented paper with whatever is left after all expenses are paid?

Brian Pulaski · Answer

@Patrick Philip I agree with @J Scott, I would worry about getting one house under your belt prior to going after as many as you can. Have you made any offers? Have you made 10 offers? Have you made 50 offers? Until you start flipping houses, I wouldn't worry about flipping as many as you can!

J Scott · Answer

Trying flipping one house. If that goes well, then you can focus on flipping "as many as you can"...

Corby Goade · Answer

Why would anyone give you a zero down loan when there are thousands of people with decades of experience out there willing to pay market rate? I'd suggest you find one of THOSE people and ask to work with them either for free or at a very reduced rate in order to get some experience under your belt.

Andrew Johnson · Answer

@Patrick Philip I think you're putting the cart before the horse. I'd hazard to say that 99% of people on BP "want to do as many deals as they can" or "want to own as many units as possible" or...or...or. So far it doesn't look like you've completed the first one yet and given yourself a rate-of-return. Much less completed a 2nd flip/rehab and given an invest __% return. Much less completed 2+ rehabs at a time to give yourself or investors __% return. Consequently, I can't even posit the interest rate that I'd want to see if I was a lender for a flipper with (so far) zero track record and no skin in the game. It's just a nightmare scenario. You have way more fiscal incentive to make sure Flip #1 goes well and far less to ensure that Flip #2 (where my money is) goes well. You have principal capital at stake in one and none in the other. You keep all of the profit is Flip #1 and potentially have to share the profit in Flip #2. When you do end up selling Flip #1 (hopefully for a profit) you probably want to divide that capital so you have skin-in-the-game with Flip #2 and Flip #3. You can approach the same lender about partnering on Flip #2 and Flip #3 or go to different lenders. At least in those scenarios you have money at risk in any deal you expect a lender to put their capital at risk in as well.

Chris Purcell · Answer

Oh man is this the truth. I tried to do my first 2 rehabs simultaneously and I'm going through hell right now.And to answer the OP - the collateral is the property they are lending you money for? Is that the question?

Kenneth Garrett · Answer

@Patrick PhilipYou need to start small to create your system and develop your own credibility. When I started I partnered on my first two projects to develop a plan and build my own credentials. I use private money for my buy n holds and pay the interest at the end of the project (debt investors). On my flips I create a LLC and they are equity partners splitting the profit. There are never any guarantees in this business. If you can't sell the flip what are my options. Rent, lease option, etc. Have more then one exit plan for the unknown.Good Luck.

J Scott · Answer

In addition, there was another thread by Patrick where it sounds like he has his first deal, but based on the questions he's asking, it doesn't sound like he really understands the basics of getting it done. Trying to do multiple projects before fully understanding the mechanics is a recipe for disaster...

Patrick Philip · Answer

Because I'm trying to flip as many houses as I can. All my cash will be already tied up in other projects, so my only way to expand is to get deals with $0 down.

Matt K. · Answer

why are you trying to set up a bunch of people to fund your deals when you could just go get the money from a HML?