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How do investors ACTUALLY afford to purchase and flip homes for profit?
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[A Thread]
[A Thread]
When I first started studying real estate at 19 I was completely baffled on how people could afford to not only BUY a home, but also afford to fix it up and get it ready to sell for a profit.
I was convinced it was only for the super rich.
I was convinced it was only for the super rich.
Then as I started to run my money up in other businesses and looked more into the flipping world, I came across the world of short-term lending.
There’s dozens of creative ways to fund these investments, but there’s two MAIN ways I want to discuss.
There’s dozens of creative ways to fund these investments, but there’s two MAIN ways I want to discuss.
HARD MONEY LENDING & PRIVATE MONEY LENDING https://abs.twimg.com/emoji/v2/... draggable="false" alt="đź’°" title="Geldsack" aria-label="Emoji: Geldsack">https://abs.twimg.com/emoji/v2/... draggable="false" alt="đź’°" title="Geldsack" aria-label="Emoji: Geldsack">
Let’s start with hard money (HML)
HML is basically a bank that lends out short-term (6-12months) loans with high interest. The lenders give you the money to basically buy the home “Cash.”
Let’s start with hard money (HML)
HML is basically a bank that lends out short-term (6-12months) loans with high interest. The lenders give you the money to basically buy the home “Cash.”
Private Money is basically a term for getting funding outside of a traditional banking or lending institution.
This could literally be your rich uncle. An old passive investor. A group of investors. A cash-heavy partner. Etc.
Now what’s the difference between PM & HML?
This could literally be your rich uncle. An old passive investor. A group of investors. A cash-heavy partner. Etc.
Now what’s the difference between PM & HML?
HML is usually more official, paper intensive, slower, expensive (random fees) and is done by a company.
Private money is usually more of a relationship-based agreement, and can sometimes be a little cheaper because it’s an individual.
Let’s see examples.
Private money is usually more of a relationship-based agreement, and can sometimes be a little cheaper because it’s an individual.
Let’s see examples.
Here’s a house I flipped last year using private money. My partner had a connection who would pay for the entire purchase price, all we had to do was pay for the rehab.
His terms:
3 points
12 month term
12% interest
(I’ll explain what this all means)
His terms:
3 points
12 month term
12% interest
(I’ll explain what this all means)
We bought that house for $132,000
Rehab was $32k
So the total loan was $132,000
-
3 “points” means he wants a flat fee of 3% for doing the loan.
3% of $132k = $3,960
12% interest is 12% PER YEAR. Meaning 1% per month.
1% of $132k = $1,320 due per month.
Rehab was $32k
So the total loan was $132,000
-
3 “points” means he wants a flat fee of 3% for doing the loan.
3% of $132k = $3,960
12% interest is 12% PER YEAR. Meaning 1% per month.
1% of $132k = $1,320 due per month.
We held the property 3 months. Which means 3% basically.
The loan cost us $8,000 and we sold the house for $239k and made ~$60,000
The loan cost us $8,000 and we sold the house for $239k and made ~$60,000
Now let’s explain how hard money works for a house I’m flipping now.
3.5 points
11% interest
12 months
They pay for 85% of the purchase and 100% of the rehab. This house cost $183,000 so we needed around $30k DOWN AT CLOSING.
3.5 points
11% interest
12 months
They pay for 85% of the purchase and 100% of the rehab. This house cost $183,000 so we needed around $30k DOWN AT CLOSING.
You can use the same formula above to calculate how much the loan costs.
HMLs are more “secured” meaning you have to get an appraisal and inspection before they will lend to you. They want to make sure they can make money.
You’ll need around 15-20% down of the purchase price
HMLs are more “secured” meaning you have to get an appraisal and inspection before they will lend to you. They want to make sure they can make money.
You’ll need around 15-20% down of the purchase price
Lastly. Most times you’ll need to front the rehab, in stages, they inspect, and then they will reimburse you.
You’ll def need around $30-$50k to play. But considering the whole job cost $250k-$300k, that’s a small chunk and you can most times double your money.
You’ll def need around $30-$50k to play. But considering the whole job cost $250k-$300k, that’s a small chunk and you can most times double your money.
Financing is a HUGE part of any renovation business and building connections and having options is the key in making sure you can fund any deal.
Hopefully this cleared up some questions you may have had!
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Hopefully this cleared up some questions you may have had!
Follow me on IG @AGENTDOOLEY for more daily REI tips
