I’ve had a goal of flipping properties for the past year. After doing lots of reading and saving, I think I’m ready for action. I’ve saved up approx $25K on my own, and my parents have agreed to loan me an additional $25K with favorable terms. I’m also adding an additional $1K to my savings every month. I live in Northern Va just outside of DC. Single family houses near where I live start around $300K, so I’ve decided to concentrate a little further from DC. There is a city (Woodbridge) 30 min south where homes needing rehab start round $100K.
I have a few questions and would appreciate input:
Do you think it would be better to use conventional bank financing or hard money? If I went the bank financing route, I could put 25% down and have $25K left over for rehab and holding costs. The only reason I would consider hard money is I’ve heard hard money can be used more similarly to cash, and banks may be willing to accept a lower offer if hard money is used.
Would I be better off finding cheaper deals further away that I could finance completely with cash? If I was willing to look further away, I could avoid using a bank/hard money altogether. My concern with this is the difficulty in finding deals and completing rehab from a distance, especially given my lack of experience.
Any input would be appreciated. Most of the posts I come across either deal with investors having no money or loads of cash, so it would be great to hear from anyone who has been in my position before.
the reason to use hard money is to save your cash, to leverage yourself out farther,you could end up with very little of your own cash in the deal, if the deal is right, with hard money, so you can take on more than one project (but you will have to keep a certain amount of cash reserves)
you can’t get a better deal with hard money, many times people think they are making a cash offer if they are using hard money, they are not, it does involve financing and is not a cash offer
look at average days on market in the areas you are looking at,you can get killed with holding cost if it takes too long to sell a prpoerty
I agree with Andydallas.
Keep your cash as much as possible - use OPM (other people money). Even the richest real estate moguls (Donald Trump) leverage and keep their liquid assets aside.
Mortgage and real estate loans when applied properly are constructive debt, not destructive like a credit card debt or car payment.
Thanks for the replies. Since I’m just starting out, I’d only be flipping on one house at a time in the beginning. Because of this, having all my cash tied up in a single deal isn’t a big concern for me, especially since I’ll be pulling it back out after a few months. I’m leaning towards using a conventional loan for my first flip so I’ll be more protected in case I have to hold onto the property for longer than expected. Besides not requiring a lot of cash, are there any benefits to hard money that I’m overlooking?
kdhastedt, I should probably referred to Woodbridge as an area. I’ve looked at Dale City, and I’m considering that area as well. I’ll have to take a look at the others you mentioned.
I looked at Woodbridge back in the mid-1990s. SFRs needing rehab were selling for around $100K as HUD foreclosures, back then, too.
No matter what financing vehicle you use, it is still all cash to the seller. Your purchase offer may be accepted more quickly and without a counter offer if you agree to a quick settlement.
You probably won’t be able to get bank financing on a fixer-upper anyway…banks don’t like to loan money on properties in disrepair.
Hard money fits the bill, but private lenders are even better. The money is cheaper and easier to get.
Warning - rehabbing is undoubtedly the absolute most difficult way to make money in residential real estate, bar none. As others have eluded, it’s full of pitfalls, risk, and hazards. With that kind of money in hand there are much easier ways to make the same kind of money. You may want to consider looking into seller financing and options. Much less risk and just as profitable. Just a thought. Good luck!
I grew up in Fairfax County, Virginia so I know the area and the market, we have been working to establish a real estate investment and development holding company at Tyson's Corner Virginia for the last year and buying properties up and down the eastern seaboard!
I am well connected there in northern Virginia as most of my high school friends have established careers and families there and some hold important government jobs in washington DC!
You have leveraged your self already by 50% through borrowing money from family based on your good credit, hard work ethics and your families good faith! Be conservative starting out, don’t put your self in a position to lose money, don’t leverage your self beyond your means and keep a reasonable reserve of funds aside to pay for debt service, unexpected overhead and change’s, repairs and unknown items sure to come up!
You are going to probable be able to use conventional financing for 8 or 9 out of 10 homes, and although your buying homes needing remodeling it is likely that most of these homes will have working baths, kitchens, hot water heaters and HVAC systems allowing you to acquire conventional financing!
Take your time, understand your market and evaluate your investment to make the right move into the right position, you will get to a point where you can do 2 or more properties at the same time and you have every ability to be successful as the market in Northern Virginia is pretty stable!
Hard money is financing and although it has benefits it also has negatives and although it can work well and be beneficial your main benefit when buying is ability to do a relatively quick close! (2 to 3 weeks!) But you have to weight out terms and points when using hard money!
I work for the Department of Defense in Falls Church but we are moving to Fort Meade - I move in June. I live over in Maryland. I lived in Virginia for about 12 years…my kids still live in Manassas.
You may want to use a bank on your first deal simply because hard money becomes expensive quickly. You’ll learn a lot on the first deal and you want to learn those lessons with time on your side. Hard money is great. I love using it for all the same reasons everyone else has said already.
However, you’ve going to learn a ton on your first deal. One of those things is nobody will move as fast as you want them to move. Hard money lenders want their money back as soon as possible and they structures their deals to try and make that happen.
I’d look at using a bank at least your first deal… banks give you the benefit of still leveraging your money (not as leveraged as a hard money lender will let you be) and they don’t kill you with super expensive fees. Banks also look much longer term on the deals they fund. If you use a bank, make sure they don’t include any “pre-payment penalties” in the documents.