Hi. I have been reading J Scotts book about flipping houses and I am in chapter 6 so far. And from what I understood so far, flipping make sense if you purchase the property all in cash and otherwise it is not that profitable? Did you guys also had that impressions? I know I have posted few posts ago regarding flip experience, but still would like to hear from you all, how you started your first flip? Did you purchase the property all cash and loaned the rehab part? or was it all financed?
Hey, first post on here, long time listener of BP. This question is very relevant to something I have been experiencing.
I know that everyone hates this answer, but it's that "it all depends". I have been using a private lender that charges me a fee of 5K and 12% interest only. Sounds like a lot right? Yes, it is a lot. The thing is, I didn't have good credit or much cash when I started, so it was basically my only way of doing a deal, and it came with the upside of being able to close very quickly (in under a week in some cases). It also came with this other reality: I could only buy deals that were not only home runs, but grand slams lol.
So my advice would be, if you don't have 50-100k to do a deal, but maybe you have 10-20 or even less, just be patient and find a deal that has enough meat on the bone to where you can do it and make a great return on your time and money. Be honest and conservative about your rehab and transaction costs. Closing costs on the way in and out, realtor fee of 5-7%, property taxes, mortgage, etc etc.
Will you make more money on flipping a 40k house if you use your own cash for the purchase and rehab versus usin g a hard money lender and a credit card? 100%. Will you make more money if you use your 40k to put down on a quadplex for 200k that you can flip for 400? Maybe. There are many ways to skin a cat, I would just think about it and do the math and talk to people who are doing what you want to do, and I would do whatever gets you to take the most amount of action and move you as far forward as possible.
Personally for me, I would pay a little more in fees to use some debt to buy a deal, for a few reasons. One being that it kind of lights a fire under my behind because I feel like I have someone else counting on me to get this deal done and hit it out of the park.
It can really work either way. My first flip (I've learned a lot since then) was a conventional mortgage. I ended up spending a lot in closing costs, insurance, etc, which were chalked up to 'a learning experience'. Many investors do flips with hard money loans. Higher interest, but shorter periods.
Of course, it's always 'cheaper' if you have your own cash, but the concept of OPM (other people's money) will allow you to scale and do more deals than you can on your own.
@Mike McCarthy thanks for your input. If you don’t mind me asking was your first flip a completely distressed house? Was it a single family? Did you choose a location that was expensive? And based on your experience would you suggest a newbie to start hard money or conventional loan?
Last but not least, when you do your flip projects for how long do you plan to hold it max after rehab was done?
My first flip was a run-down, but pretty much livable house. There was some roof leakage which caused a ceiling mess inside, which almost scuttled the whole deal. The bank almost didn't lend because the house wasn't "livable" (with the 8x8' ceiling damage), and had to sweet-talk the town inspector to give a CO, due to the ceiling damage and a few cracked windows.
Honestly, it was my first and last flip. Made a little money on it, but not much after taking into account the hours of labor spent on it. But the experience was invaluable.
If I did it again, I would probably use hard money, and go for a less expensive house with less work needing to be done. But hey, we all need to learn somehow!
If you buy your SFR with cash, you obviously have less chance of losing the home unless you fail to pay property taxes. However, if your focus is to earn the highest interest on your money invested, then putting 20% down will yield a higher interest from that down payment. It is referred to as Cash-on-Cash which means all you are measuring is how much your down payment is earning for you. There's no right or wrong way to proceed. Those selling properties, like me, want you to leverage your money so you can buy more. You can cash our one of our homes for $150k or you could buy five homes with that same money with financing. Your decision; both options have advantages and disadvantages.
Hey, first post on here, long time listener of BP. This question is very relevant to something I have been experiencing.
I know that everyone hates this answer, but it's that "it all depends". I have been using a private lender that charges me a fee of 5K and 12% interest only. Sounds like a lot right? Yes, it is a lot. The thing is, I didn't have good credit or much cash when I started, so it was basically my only way of doing a deal, and it came with the upside of being able to close very quickly (in under a week in some cases). It also came with this other reality: I could only buy deals that were not only home runs, but grand slams lol.
So my advice would be, if you don't have 50-100k to do a deal, but maybe you have 10-20 or even less, just be patient and find a deal that has enough meat on the bone to where you can do it and make a great return on your time and money. Be honest and conservative about your rehab and transaction costs. Closing costs on the way in and out, realtor fee of 5-7%, property taxes, mortgage, etc etc.
Will you make more money on flipping a 40k house if you use your own cash for the purchase and rehab versus usin g a hard money lender and a credit card? 100%. Will you make more money if you use your 40k to put down on a quadplex for 200k that you can flip for 400? Maybe. There are many ways to skin a cat, I would just think about it and do the math and talk to people who are doing what you want to do, and I would do whatever gets you to take the most amount of action and move you as far forward as possible.
Personally for me, I would pay a little more in fees to use some debt to buy a deal, for a few reasons. One being that it kind of lights a fire under my behind because I feel like I have someone else counting on me to get this deal done and hit it out of the park.
if you can build cash reserves while learning and trying and find and do a deal with as much of your own cash first might be better....for mental emotional health, flexibility to make mistakes..improve skills. investing; flipping is more mind set than needing OPM.
I am on my 9th flip and moving to a different state as well. The first 3 flips was conventional then I was able to use equity out of commercial building as a line of credit theses were all in Iowa then moved to Florida and starting all over the bank here wouldn’t lend for my projects and had to turn to hard money lenders first was Groundfloor and worked fine but a lot of fees and the ninth Florida home Has switched to Lendinghome a hard money lender AND they work similar to a bank very streamline and a lot less fees extremely happy with the experience.
Bottom line you have to find a property to that has enough equity and they are there choose wisely!
@Gina Kopera hm, thanks for your input. When you started your first flip, was the location A+? Right now, I do see some properties where I can purchase with cash for like 40K, but location is F and to be honest, I am not quite ready to start investing in sketchy places
@Matt Berklacy thanks for your comments. Yeah me and my friend we want to use our money as much as possible. But when it comes to find a deal, isn’t it better to find an agent when you already have a cash or that can be done while saving money?
My first flip cost 20,000, the home had caught on fire and 60,000 rehab. The area was not a pricey area but well sought. I sold it for 110,000 and had both sides meaning no commission pay out.
I am realtor/broker and most states BUYing with Realtor you do not pay commissions ONLY when selling.
Find a realtor that will set you up on auto notify on the MLS for properties whatever your criteria is and the properties will go straight to you from the local MLS.
@J Usmonov
I think it can work both ways. If there is enough potential profit in the deal , you can afford to pay interest and/or bring in a capital partner to split the profits.
In my opinion it’s better to have a portion of a profitable deal then no deal at all. Most flippers need help in financing purchases till they build up enough funds to afford the entire deal themselves.
Best of luck in all your endeavors.
It can go both ways but it really depends on the deal. Personally I like leverage since the returns can be better and you can do more deals at once i.e. you buy 1 house with 100k and make a 10% return or buy 5 houses 20k down on each. However if you have the access to the cash you can go that route. Depends on your situation
@J Usmonov my first several flips were all cash, half mine, half my brother in law.
I tend to be fairly conservative (as much as a flipper can be) so felt like doing a reno was enough risk to not need to layer on mortgage payments.
But it can be done several ways. Yes leverage will let you get more deals done with the same amount of equity, but trying to do several at once is more risk than one at a time. To me it is all about calculated risks.
The most we have made on any single flip was with a hard money lender. The only loss we took was with a hard money lender, and the loss was almost exactly the same as the sum of our interest payments.
And as for areas, we only invest in neighborhoods we know very well, many in the neighborhood we live in. That means less deals, but also less risk. We also do what are essentially professional starter home prices. We like being able to sell in the mid $200's to lower $300's. And quite frequently we are doing near guts these days, with all new and permitted electrical, plumbing, cabinets, counters, flooring, etc.