The goal for every real estate investment transaction should be to come out-of-pocket with as little as possible. This is sometimes called â€˜leverageâ€™, or â€˜other peopleâ€™s moneyâ€™. Although it does sound nice to use other peopleâ€™s money to finance your investment, there is a price that comes along with it.
I am going to discuss various ways to finance your â€œfix & flip dealsâ€, and hopefully shed some light on some new ways of financing investments.
The obvious way to finance a deal is through a conventional loan: 20% down, 30 year fixed rate â€“ or you could get in with a 15 year, or even an ARM. This is NOT the best way to finance a â€œflipâ€ deal. Remember: The goal of a flip deal is to get in with as little as possible, and get out fast.
FHA loans have requirements that you will live in the house for X number of years, so this wonâ€™t work either â€“ unless you plan on buying the house as a personal residence, then you can roll yourÂ rehabÂ expenses into whats called a FHA 203k. With a FHA 203k you can roll your rehab expenses into the loan, as well as the purchase price of the house. Remember, this is only a feasibleÂ option if youâ€™re planning on living in the house as your primary residence.
The other (and best) route you can go is cash. Private money is a big in real estate. I remember in one of my real estate investment books it said there are two kinds of real estate investors:
Those who have time, and no money.. and those who have money, and no time.
Which kind of investor are you?
If youâ€™ve got time, and no money â€“ then you need a private money guy. Either someone with deep pockets who is willing to stake you $40-150k, or a bank willing to put the money up behind your investment.
The good thing is, there are banks who do this every day â€“ they are called capital banks. They deal strictly with investors and investments, and do not handle the traditional transactions that the general public typically uses a bank for. These kind of banks already have worked with real estate investors before, and they have their own ways of doing things.
One way to find these banks is search Google for â€œhard money lendersâ€ in your area.
Hard Money Lenders doÂ exactlyÂ that â€“ they bring money to the table, at an increased cost. They finance deals that most banks would not finance. Their deals are considered â€œcashâ€ deals, and they can typically close within 7 days.Â ExactlyÂ what distressed home owners, or banks want.
Your hard money lender will typically charge you anywhere from 12-15% for the money, and sometimes origination â€œpointsâ€ on the loan. 1 point is 1% of the loan, 2 points is 2%, etc.
You will also be able to roll the rehab cost into the hard money loan.
You will still need to come out of pocket with some expenses. Typically, you will incur about $5-10k out of pocket with a hard money deal (numbers depend on how much your rehab expense is, how much the purchase price is, etc).
Your potential profit can be $5,000 or it can be $50,000. You maximize your return on investment by limiting the amount of funds you put in, and staying on a strict budget.
We will go over this more in depth in the next few chapters of this blog.
Here are some Houston area hard money lenders: