How much cash reserves needed to start?

Question

Howdy,

Just curious as I am sure this varies from location to location. Given the current lending and credit climate, how much cash reserves would you consider enough to start a business flipping homes?

Would it be 20K, 50K, 100K?

Here in Dallas, TX there is plenty of homes in the 75-125K range (ARV) which I consider my target market. Several of these homes can be had for 15-30K needing an additional 15-20 in rehab costs.

I can't help but think that one should be able to be successful starting a business flipping homes with as little as 20K with these circumstances.

I understand that one could probably only do one deal at the time to start with and that you would risk to loose all of it with that small of a reserve.

What say you professionals? How much did you start with and do you wish you would have had more or less cash when you started?

Does it not hinder (or at least slow down) the process of learning to use other peoples money when you put in too much of your own cash in the beginning?

J Scott · Answer

I get asked this question often, and it's very difficult to answer...

There are a lot of things that come into play...for example:

- What is your FICO score? (since this will help determine your ability to get a loan)

- What experience do you have? (again, helps to get a loan)

- How much money do you need to make to live?

- What price range are the deals?

- Can you get money from friends/family?

- Can you find other private lenders?

- Do you have a bank in your area that does portfolio loans?

Only once you have the answer to these types of questions can you really know how much capital someone would need personally to invest full time.

Vikram C. · Answer

I think it is important to capitalize a new business such that it can afford to take some initial losses.  That gives you time to learn and improve and eventually succeed.

I would suggest that you start the flipping business with sufficient capital for at least three deals.  Based on your numbers, it appears as if that would be about $300K ARV in properties, which you have stated you can acquire for about $100K and rehab for about $60K.  You should probably assume a few other costs in there of about $40K because you will be doing this for the first time and can expect some unpleasant surprises.

So that tells me that you would need about $200K in total capital.  You should contact local hard money lenders and find out which ones are willing to lend you for both acquisition and rehab costs.  If you can find lenders who are willing to do that, you may be able to start the business with just about $100K in your own equity.

It is, of course, possible to start flipping with only enough capital for one deal.  But that increases your chance of being a one-time flipper.

Ryan O. · Answer

Stefen, I am in pretty much the same situation as you, just starting out.  I can tell you I was fortunate enough to find a private lender willing to put in 80% or more of the total purchase, holding, and rehab costs for my first deal.  Allowing me to start investing with as little as 25K (Property ARV's 145-180).

My buisness plan is to only flip one property at a time, until I am able to find other private investors or convince local banks that I have enough experience to be an attractive candidate for lending.

I am also not quitting my job until I have proven to myself I can be successful at REI over the long haul, plus having steady income will help in securing funding from banks.

Brendan J. · Answer

How would this change if you were simply wondering when to start part-time? I'm currently trying to build up more cash reserves before jumping in hopefully this summer.

25/M
FICO - 745
3 Years Experience in my field (Logistics Brokerage)
$2000/month in surplus cash (I've made the wife and I stick to a very stringent budget)
About $25K in liquid cash

Thoughts? What should I get this reserve up to before I start? 50K?

My current goal would be to start with some solid, not over-the-top, rehabs to further build up cash reserves. Followed by alternating Multi-Family cash flow properties with SFH B&H strategies. All the while doing 3-4 rehabs per year to help with the downpayments.

Stefan Forsberg · Answer

Thanks Bryan,

Working on that as we speak :)

Your input and recommendations are greatly appreciated and taken to heart.

Bryan Hancock · Answer

Stefan...your business plan that I reviewed needs more meat if you intend to use it to raise cash.  I would also suggest focusing on deals you have done in a track record section of sorts if your audience will be investors.

Stefan Forsberg · Answer

Great points as well J Scott,

This was kind of the whole point with my original post.

As there are multiple ways of funding a business (some of them you just listed here), will a person be better of using all of his own cash to start the business or is he/she better of using creativity to try to use as much of other peoples money as possible?

Personally I think that it is more beneficial to try to get funding from other resources then using your own cash. Like you mentioned, they will scrutinize your business plan, your experience etc. with much more detail and objectiveness then you would as you are biased towards yourself.

If you can get other people to fund the business (maybe not family and friends) then you should feel confident that you have a solid business plan and that you have done your due diligence well. Now that doesn't necessarily translate in to being a success as you still need to execute the plan but at least you are off on the right path.

Stefan Forsberg · Answer

Thanks Ryan,

I am sure there is plenty more like you and I out here. Like you I have no plans to quit my day job yet, but before I am 50 this is what I will do full-time, just need to put my plans into action...

Good luck with your efforts.

Stefan Forsberg · Answer

Great points Vikram,

Especially the point about about planning for losses in the beginning. 
I am sure that each case is a bit different from person to person depending on what experience you have when starting out.

For example, a General contractor will have a great advantage in terms of estimating repairs and getting good pricing from all trades which might lead to him or her being able to better identify the deal amongst all the duds.

I am so grateful I found this forum, I have learned more here in the past month then I have in the previous 6 months.

BP rocks  :D

Mat Lewczenko · Answer

I am interested to hear some replies to this as well. Good post.

How much cash reserves needed to start?

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