Finding Money For Your Flips

funding Jan 19, 2020

Finding Money for Your Flips

Years ago, when I was first starting to flip houses on a larger scale, I had a partner tell me money would not be an issue.

Now, I probably did have the wrong mindset back then, but I told him money was always a problem! Well, I'm here to tell you he was right, and I was dead wrong.

Over the years, money really has been one of the easier parts of the equation. There are so many options. You can work with local banks, or maybe you have friends or family that would want to invest, others may want to do joint venture deals possibly. 

The other way that I want to talk about today is hard money lending. This way of financing projects is sometimes the easiest way for new investors to get started.

Basically, you have an individual or company that lends money to others for purchasing and renovating properties. The rates they charge are going to be much higher than a bank, but if the bank is not an option, then hard money may be a good alternative.

I'm not saying the rates don't matter, however, if you make sure you can make money with their rates, then it could be worth proceeding.

You have to understand these loans are much higher risk, so a hard money lender has to charge more to cover those higher risks.

Typically, they will charge a percentage of the loan upfront and then a percentage on the money borrowed.

For instance, a lender may tell you that they will charge you 4 points and 12% interest on the money for the amount of time you are using it. If you were borrowing $100,000 for four months, it would look like this:

  • $100,000 X 4% (or 4 points) equals $4,000
  • $100,000 X 12% equals $12,000 (this would be for a full year)
  • $12,000 divided by 365 days equals $32.87 per day
  • 122 days (4 months) X $32.87 equals $4,010
  • $4,000 + $4,010 equals $8,010 Total money costs for 4 months

The most important thing about borrowing money like this is that you build it into your numbers. I did a flip recently where my money costs were a little over $4,000.

It was a small townhouse that I knew would be a quick flip. Even with paying a hard money lender, I was still able to make around $15,000. This deal made a lot of sense. It was not a lot of money, but we didn't have the property for 90 days. 

One last thing about hard money lenders is that the rates will vary from person to person. Shop around and talk to a few.

The numbers above were used as an example. Many lenders in our area use those numbers exactly; however, I'm not paying those rates.

The more deals a lender does with you, the more comfortable they will be lending in the future and possibly give you better rates. 

Like my old partner said, "Finding money will not be an issue."

I can tell you he was right!



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