Cash reserves needed to begin a flip

[Kam Lau]

As a new investor I’m like a sponge. I’m looking for every piece of knowledge that I can find to fill my head with as I begin my journey.

The question I’m asking my peers on here is, how much money should one have in reserves before starting a Fix & Flip, considering I will be using a Private Money Lender. I know I will need to raise the money that they will not cover, 20-25% of the buying price. I know some people do this with no money in reserves but that seems a bit risky to me. I’m looking at buying a property in the 80-100k range, single family.

How did you do your first deal? What are your thoughts on this? Do you recommend PML or Hard Money and why? Any input will be greatly appreciated. Many thanks.

[Michael Kinsella]

Hi Kam,

To provide a quick example of what @George C. is saying, let's say that you have a rehab budget of 45k.

Within this 45k rehab budget, you perform three equal construction draws of 15k each.

When working with most hard money lenders, you would be responsible for floating this initial 15k.

The way the math works out is...

You put out 15k and are then reimbursed the 15k by the hard money lender.

You then put out the next 15k and are reimbursed.

You then put out the last 15k and are reimbursed.

As you can see, the hard money lender is technically financing 100% of the rehab, but you don't get the effect of that until the rehab is complete.

Hope this helps,

Michael