Use cash or hard money for flips??

Question

Hey everyone,

If you had hypothetically around 85,000 cash would you use hard money for your flips or just use cash to avoid the inspection costs with appraisal,points,and loan carrying costs??

I like the idea of hard money to preserve the capital and use their money for flips.

With cash I have total control but cash outlay until it sells.I will also get the 3 to 4% broker co-op when I buy.

If I bought cash I would let the listing broker have it but if I used hard money I would want to offset points I paid out.

I do have private lenders but they might want too much control or cut of the deal.

Would it be best to use hard money for acquisition and then my capital for repairs?? This way I wouldn't have to wait for a hard money lender to inspect and release in draws and delays.

I have mostly sold for clients and not completed any flips myself but have been studying for years.I can get 3/2's needing rehab for in the 20's in my area.

Resale around 95k to 100k.

Thanks for the input..................

Jeff S. · Answer

While it obviously boils down to supply and demand, I always read with interest on BP the difference in HML rates and fees around the country.  I swear that sometimes I want to move.  There are a number of brokers I use in southern California willing to originate a note for a fixed fee.  Of course it depends on the amount borrowed, but this typically works out to much less than a point.  The rates and fees I see here for flips are closer to 12% plus two to three points on a three to six month note â€“ not that this helps you in Georgia.  Property values in southern California are so much higher, that even if you had to pay $4k, the amount is more palatable.  The decision between borrowing hard money and using your own cash amounts to the risk youâ€™re willing to take, how much time youâ€™re willing to allocate, and the discount you can buy properties for.

The rehabbers I tend to work with could probably buy and flip two to three properties at a time completely on their own.  All choose however, to leverage themselves into five or six deals at once, or more in a few cases, and leave a bit of cash aside for the unexpected.  In general, theyâ€™ll borrow as much of the purchase money as possible and fund the construction on their own.  These are all full time rehabbers who have the time to manage numerous projects at once.  Some even run their own crews.

Most rehabbers I know are partnered with someone where one finds the deals and handles the money, and the other is in charge of construction.  If you are doing this alone, maybe part time to supplement your real estate business, and maybe with relatively low dollar deals, Iâ€™d suggest you use your own money on as few project as you can handle.  As youâ€™re able to dedicate more time, and depending on the amount of meat on the bones, you might slowly leverage your money.  Thereâ€™s no sense leveraging a deal you can easily manage on your own, which is where Iâ€™d start if I were you.

Lastly Joel, with these fees, a HML would be out of his mind to charge a pre-payment penalty -- unless he has no other business,.  The faster you pay, the higher his return.  Velocity of money is the name of this game.  Keep looking.

Jeff

Loc R. · Answer

It really comes down to this:  can you find & manage multiple flips at one time?

If you can, then use your money + hard money to take on 2 or 3 projects at one time.

If you cannot, then use only your money, do 1 project, then move on to the next one.

J Scott · Answer

I would use cash over hard money any day.

That said, the question becomes more interesting when the lender is charging more reasonable rates (typical portfolio or private investor loans).  This is my situation -- I have cash for several simultaneous flips, but I also have access to portfolio loans and some private money.

Generally, I'll use my own cash until I only have enough left to do one or two more flips simultaneously.  At that point, I'll go into cash preservation mode, and will start using loans.  I do this so that the majority of the flips I'm paying as little as possible (using cash), but I'm also saving a little cash in reserve should a great deal come along that would require me to use cash.  An example would be the recent REO deal I did where the bank said they'd sell it to me if I could close in a week (before the end of the month).  Having cash allowed me to do this, whereas I wouldn't have been able to finance the deal that quickly.

J Scott · Answer

I much prefer subdivisions, but if the deal is great on a non-subdivision property, I wouldn't ignore it...

Chris Vasquez · Answer

Joel, If you have never done a flip before. Use your cash on the first few. If you are buying at 20k and spend 20k for rehab and sell for say, 80k. 50%! That is a nice profit. Get a few under your belt without the added pressure of paying off a loan shark cutting into your profits. Don't Bite Off More Than You Can Chew. There will be plenty of properties to make money on. Just be patient. Besides, by using HM lenders it sounds like it would cost you around 10k. That drops your profits down to 33%.  If you could do one house per Qtr. Bought fixed and sold. 40k x4=160k. That may not seem like a lot to some of the big guns here but for a beginner, SWEET! It's better than workin for the Man.  JMHO.

Paul B. · Answer

Compared to my market, I think the discrepancy is that your lender is doing only 60% of cost, whereas other lenders are doing not only a higher percentage but also a percentage based on ARV. Given that the higher LTV loan presents an equity-like risk, it's priced for equity-like returns.

Jake Kucheck · Answer

Joel-

If you're in CA, hard money rates (at least the companies I deal with) are more like 1-2 pts origination (regardless of loan amount) and 9-10% I/O, 12-24 month term, up to 60% LTV (of purcahse, not ARV)

Don't know why there is such a discrepancy, but I certainly find it interesting.

J Scott · Answer

Sorry, missed this before...posted my response here:

http://www.biggerpockets.com/topics/60570-why-do-agents-take-it-personal-my-journey-to-find-my-first-flip-?forum_id=67&page=1#posts-323708

Feel free to follow-up with questions in either thread...

Joel Owens · Answer

J Scott on the flooded homes in Cobb county where the bottom part of the sheet rock is gone they are selling for next to nothing.

My concern would be after the rehab getting a lender to give a loan to the buyer on the property.

What has been your experience with these properties??

Joel Owens · Answer

Thanks Charles.

I have seen just as many contracts fall out at auction as regular sales so there is still risk.

I am not adverse to wholesaling properties.I would have to look at auctions more closely to look at pro's and con's.I see Williams and Williams all the time try to persuade banks to sell with them.Many times the winning bid falls out and the bank doesn't sell anything.

There are also fees with doing auctions such as bid premiums so the auctions cost savings isn't that much over an broker/agent.What the auction company could claim is more market exposure,bidding frenzy of auction atmosphere to drive up the price,etc.

I do appreciate the insight into auctions.

Charles if you could give an example of 1 to 3 transactions you were involved with and closed in the last 6 months it would be valuable to see how they were put together.

Thanks

Use cash or hard money for flips??

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