All Forum Posts by: Jeff Cichocki

As a general rule of thumb, the IRS doesn't allow flips to be 1031 into something else. 1031's are for rolling over long term capital gains into new projects and delaying the payment of taxes on those funds.

However, for those that do qualify for a 1031, there are other ways to 1031 that are not well known. This goes way beyond your question, but there are strategies called "Reverse 1031" and "1031 Alternative". I don't work with the reverse ones, but I do help people with the latter. It is possible to pull 95% of the cash out of a 1031 and not pay taxes on it for 30 years. There is very little documentation on this strategy out there. It is very well guarded as no one wants the IRS to get the laws changed to outlaw it. It's ridiculously powerful and really help you multiply profits and get additional depreciation on the same dollars.

Good luck on what you're trying to do.

Hard money may or may not be institutionalized. Hard money vs private money is really more of a professional vs amateur thing. 

Hard money lenders are pro's. We do it for a living. Most use institutional funds for their loans. Some of us also help place money for private people. 

Private lenders are typically people who lend money, but it's not a full time gig for them. They are also not as educated. Most don't truly understand the legalities of things and many new lenders don't know how to secure their funds properly.

Both can be good sources of capital. It just depends on what you need and whether or not you know enough to take care of your private lender properly. If you use Hard Money, the broker/lender will take care of everything. If you are borrowing private money, it becomes your responsibility to make sure that you hook them up with a good attorney who can draft their paperwork properly. NEVER DO THEIR PAPERWORK FOR THEM. if you do the paperwork for them, you can get into a lot of trouble for practicing law without a license. You could get away with it for a while, but if a deal ever goes sideways and they hire an attorney to help fix the problem, it won't go well for you.

I have quite a few borrowers who have found private money, but they referred them to me for help. If you don't have an attorney who understands lending, it is a lot safer for you to send them to someone who can help them properly. In my area, there are few attorneys who really understand what we're doing and how to protect their clients properly.

Good luck!

Be careful when when making a cash offer. I've run into numerous situations where the realtor and/or title company has a heart attack when you try to switch to financing. They sometimes view it you being deceptive (it's not you - it's the other less than honest investors who screw this up for us). It doesn't happen all the time, but it happens more than people think.

When my business partner and I make an all cash offer, we also put somewhere in the offer that we reserve the right to use financing. However, we also state that our financing is not a contingency. This way, we are maintaining the legitimacy of the cash offer. We've found that it works really well and avoids a lot of heart ache and amendments down the road.

Good luck!

I agree with @Will Barnard. HELOC's are great, but they aren't for every situation. You need to way out the pro's & con's to figure out what the best scenario for you is.

When you compare a HELOC to a HML, you have to look at more than the interest rates and fee's. You need to convert that into dollars and cents. If using a HML was going to cost $2,000 more than using your HELOC, but it gave you the piece of mind that if anything goes wrong with the deal, your house is safe, is it worth it to you (the decision doesn't matter what anyone else says you should do - what's right for someone else may not be right for you).

Can the property support the $2,000 as an expense.  Understand, there's a big difference between a cost and making less. If you look at every single fee as a cost, you'll miss out on opportunities because you only looked at one side of the equation. If the property is truly a good deal, it should be able to afford the expense. That expense equates out to you making a little bit less. Is it better to have a cost or make less? A cost is something you come out of pocket for. An expense is something that comes out of your profits. It's subtle, but it's a big difference in how money works and how you think about things.

Good luck!

I hate to point out the obvious, but there are other sources to borrow money from. You can find money from Hard Money Lenders, Private Lenders, Hedge Funds, etc. All of these sources with have different rules, but many don't require a down payment if the deal is good enough. And, if you use one of these alternative sources and the interest rate is higher, don't worry about it. The property should be able to support the cost or it isn't a good deal. Plus, it's likely that this will be a short term situation and that you'll either be flipping it for cash or refinancing it to hold long term. To figure out the right solution you need to do a cost analysis on the cost of money. For example, a 12% and 1 point loan could be cheaper than a 10% and 2 point loan. It all depends on how long you'll have the property. Just like every other loan, run the amortization schedule and see where you break even is between the costs. You should do this for every property. What works great on this one may not be the best for your next property.

Good luck!

I would agree with @Jay Hinrichs, there's no need to discount a good HML if the note gets sold off. At least, not where I live. We originate all of our loans at 12%. If we decide to sell one off, we retain the servicing and a 2% spread off the interest as a servicing fee. I rarely have a note last long when I offer them up for sale. A 10% yield to our buyers is a good rate today.

Definitely head over to the local REIA's and MeetUps's. They are some of the best places to find other investors to network with and lenders who are looking to help.

Good luck!

As others have sad, shop you loans to other banks. The best ones to work with are your local banks and credit unions. Talk to them about portfolio loans (loans they keep in house and don't sell off). Every time one of my loans is paid off, I find out who their new lender is so that I can track it. I keep this list so that I can give it to my borrowers who are trying to BRRRR the property. It makes it lot easier if they know which banks like this kind of deal. It's also good for the banks, because they get to know me and how I work. They know what their getting when they refinance me out.

Good Luck!

We either wire or ACH the funds directly into our borrowers account.

Sometimes, we will pay the contractors directly for the borrower (my accountant hates that I do this - 1099's up the wazoo).

Our borrowers & their contractors love getting paid this way. It's simpler, faster and there are never any holds on the funds when a check is deposited.

@Darius Ogloza, I completely understand what your saying and it makes sense to be worried about it. Just because I never have, doesn't mean I never would. To me and most lenders out there, its a cost vs benefit analysis. It depends on the dollar amount as to whether or not a lender would come after a borrower.

I'm not an attorney, but my understanding is that a lender without a mortgage against the property can't forcefully take it. They can't force the sale. But, yes they could put a lien against it. Yes they can collect when you sell; but not until. The scenario you're concerned about is also the same if you take any other form of unsecured debt (credit cards, etc.).

Being brutally honest, most borrowers don't consider this aspect when they borrow. Most don't have a ton of equity either to worry about. For most, it's not a concern to them. Maybe it should be though. Unfortunately, most people don't have the financial education to even they should be.

Good luck.