Should I use all of my Cash or use Bank's Money

Question

Hello all,

I am going to be buying a house to flip within a month or two but before I start I would like to get your opinions how to use "Our Money" for investing in real estate.

Me and my wife currently have 65k in our savings and would like to use it to start our RE flipping business.  She will be still working at her company(nets about 2500/month), and I will be working part time(will net about 2000/month) at my current job and part time working on RE acquiring properties and will have GC to manage the project full time.

We are going to buy a SFH(30-40k) and the cost of the rehab will be about 20-30k.  I've talked to one of the bank and they have qualified me to get a loan of 30k(can be used for rehab), but I'm not sure if it's better to use bank's money with all the interest fees or just use my own cash if I have it.

We don't have any kids or debts to pay on a monthly basis except our rent and car payment and regular monthly expenses which can be covered by my wife's and my current income combined.

We are looking for the best way to get a good start of our business, therefore your suggestions or lessons or answers will be highly appreciated!

Thank you.

Jason Kim · Answer

BTW.. I do agree with most of you and got the clear point on some of the reasons why borrowing money is better, but at the same time I am a little skeptical about the profit(not that I'm trying to make ton of money on my first deal) that I can make for putting all the time and money on the flip side..

Thank you!
Jason K.

Jason Kim · Answer

Thank you all for your replies..

The loan which I can get is a secured consumer loan and unfortunately my company is not able to get a loan yet because it's a new company.

A. I've read somewhere in this fourm that there are some people who were able to get a business loan even though their company is fairly new.  And how is it possible and what is the best way to approach to the bank to get an approval?

B. And when figuring out a number for MPP(Sales Price – Fixed Costs – Desired Profit – Rehab Costs), within that Fixed Cost does it usually cover the cost of the interest fees if some or all of the money was borrowed from the bank?  I don't have a RE license right now and the tax is about $5,000yr where I want to purchase..

Thank you in advance!

Jeff S. · Answer

The loan almost sounds like a personal loan. In any event, maybe a credit line would suit you best. This way you have the security of back-up funds but don't have to use borrowed money if you choose to save interest.

Alex K. · Answer

From my limited experience the banks won't loan on a house that needs a bunch of rehab unless you put a big deposit into escrow to cover the rehab first.  Then it becomes kind of a risk to fix up a house that isn't yours yet.

I found a great deal on a 4-plex that the bank would not lend on, so I went in with a friend and we used our savings to buy and rehab.  Now it's rented for 19% return after expenses.

So my point is you can get great deals if you have the cash because most people don't, and banks have lots of restrictions on which properties you can buy.  If it's a property banks don't like, your competition pool just got real small.

Jim Stardust · Answer

I've done both - used my own money and used the bank's, and for me personally (it might be different for you), I found out that I was much more motivated to get things done/fixed/sold when I was using the bank's money.  There's also a sense of security you will have if you keep your money in your savings.  BTW, how secure are your jobs?  How long will the wife plan on working, what happens if there's a sudden change in your life plans?  You got to keep that emergency fund for whatever life throws at you, the interest fees will be negligible if you do things right, heck, if you stop eating out a couple of times a month, that will cover your interest fees.  Use the bank's money, it's never been cheaper to borrow, keep your money!

Good luck!

J Scott · Answer

From a purely financial perspective, The two big questions you need to ask are:

1.  Could you refi later to get the money if you don't get it now?  If so, you can mitigate the risk of running out of money if you choose to use your own cash.  If not, getting the money should give you some extra security should you run over budget or need the cash for living expenses.

2.  What would you do with the cash if you didn't use it for the flip?  If it would just be sitting in the bank earning essentially no return, why not use it (though the refi question above factors in here)?

Of course, there are non-financial considerations here as well:

-  Getting the loan will build goodwill with the bank
-  Youmight sleep better knowing you have cash reserves (or knowing you don't have a note)
-  Etc...

Don Hines · Answer

Keep your reserves and make the loan. It will build a repore with the bank for maybe a few projects at once in the future. Plus, I agree with DL Berry.
Don

D.L. Berry · Answer

Cudos to you for stepping into real estate investing at this time. Well, it sounds as if the household expenses are readily met. It's good to see some savings, and the ability to qualify for a bank loan. As this is your first flip I would suggest utilizing the bank loan. It will be more of a headache, from a paperwork standpoint and you will be taking on debt in your own name. My concern is that, as a new investor projects seem to take longer and have more cost overruns. I would much rather see you have money in the bank for those contingencies, than to get to the end of your cash and have no place to go...When deal #1 sells and the profit is in the bank, we may talk about a different program for deal #2. In the meantime, remember the Boy Scout motto, "Be prepared."