Should I Use My Own Cash Or Finance?
I am in the fortunate position of having plenty of cash to invest in rehabbing but I am not sure wether i should use my own money to buy houses to rehab or to use hard money financing. My goal is to quit my job as soon as possible and do rehabbing full time. What would be my best business strategy? also how does the seasoning requirement that lenders have affect my cash flow and the timing of my rehabs. Doesnt this requirement inhibit quick retailing of my rehabs? help!
Cash or finance? Why not...DO BOTH?
If you have, for example, $100K of disposable income. Setup a CD account at a local bank and open a secure line of credit of $100K+, using that CD account. You'll earn 3% on your money, and have a line of credit when you need it that should only charge 1-3% points over your CD rate.
Cashflow can be a problem with rehabs nowadays. It really depends upon your exit strategy. To retail sell outright, you really already need to have a mortgage broker lined up that knows the situation and can get people financed. A good mortgage broker will be able to finance lower than normal credit, so you'll open the doors to more people, as well.
Roger
Other peoples money is nice, when you don't have your own. Like they say, "use it if you got it."
I would go with conventional financing, use your money to get a good rate. That way you can invest in multiple properties. Hard money costs too much-especially when you have money. When you don't have money, hard money loans can be great.
Debt engenders discipline. If your own money is fully committed (but there's no creditor breathing down your neck), your motivation might flag at some difficult, crucial stage of the project.
I'm going to have to disagree with most of the opinions here and go the other way. If you have the ability to avoid financing and use cash, by all means do it.
Unless someone is going to loan you money with no fees and no interest, there is a cost to using other peoples money, and evey dime of it comes out of your profit after you sell the house. On an average deal of a $100,000 you will put at a minimum of $5000 more in your pocket by avoiding a hard money lender, somewhat less if you go with bank financing.
As for motivation, there is no greater fear than the fear of losing $100,000 of your own personal cash in a deal.
"Golden rule" - he who has the gold rules!
You will motivate more banks and private sellers with offers that are all cash and not contingent on financing.
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I'd have to agree with Mike, I mean, yes, you are using your own money, but then you don't owe anyone, no interested is needed to be paid, not only that, but when you use your own money, your more conscious about it, only because, its YOUR money, I would definatly say use your own on this one
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Use OPM (others peoples money) when ever possible... they are resources...use them... stay liquid for that deal where cash is a must or only!
I would use both. The first of all, I would try to get comforming finance with a good rate. To avoid paying PMI and rent loss insurance, you can finance up to 75% of the purchase price. If you get home style renovation loan by Fannie Mae, you can finance up to 75% of purchase price and rehab cost combined. If you have two or more years of expereice as a land lord, and if you are willing to pay for PMI and rent loss insurance, you can finace up to 85% (or 90%?) of the purchase price and rehab cost.
If you have a lot of money to put down, you should consider getting a few properties one after another. Instead of using all your money into one project, you can have a few project going at the same time by using your own money and somebody else's money. People always talk about diversification for investing in stocks, and I believe the philosophy should be applied to REI. Having different kinds of properites in different kinds of neighborhood is difinately way to go.
Another thing you can consider is a commercial property. To get financing commercial property, you have to put down at least 10% (if you can get seller second) to 40% down. A lot of people wish that they could get into commercial property REI, but it is not simply possible for them, because of lack of money to put down. It looks like economy is getting better, so commercial properties should start appreciating nicely.
I wish I were in your shoes. Good luck investing your moeny wisely.
You will probably need more than your own money unless you're incredibly loaded. Good rehabs don't seem to come along at the most convenient times unless your are extremely lucky. It has been my experience that I will find three or four properties over a short period of time and then I might have to look for 2 or 3 months to find a deal I really like. If you tie up all of your cash in one or two houses while they are waiting to be renovated or sold you will have to probably get a loan at some point to keep everything flowing smoothly.
thanks to everybody for their advice! I think I will probably use some financing so that I can get several projects going at the same time.
Stick with OPM then your FUTURE leverage with credit will increase!
Eric & Rosa
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I enjoyed reading the various viewpoints on this question. I just wanted to share an experience that recently happened to us. We just bought a foreclosure for an incredible deal that should bring a fantastic return. We decided to pay cash for a number of reasons 1) It would save us about $4000-$5000 in fees from lenders, required insurance, etc. 2) Speed - We need to get this flip knocked out and ready to sell in about a month tops (with a lender we'd likely be tied up at least 2-3 weeks waiting on paperwork, appraisal, etc.) 3) Price - It was low enough we could comfortably cover it with our money allocated to real estate. 4) We are also working on a couple other online business ventures so we don't want to work on more than one property at this current time.
So, as said previously, it all depends on your strategy. If your desire is to have several properties going at the same time, it may not be wise tying all your finances up into one deal. But on the other hand, we closed the deal in a couple days and we'll probably have the property rehabbed and up on the market at about the time we would have closed had we gone through a lender. Since it's a fairly hot market, we should be able to have the money back plus a great profit within a couple months.
BTW, we beat out two other offers for one simple reason - we paid with cash. The other two offers were also cash, and the bank said they would have gone with one of them if we hadn't done an all-cash deal. Sometimes you miss the deal if you can't pay cash because it is more attractive to the seller than having to wait and deal with financing.
UUUUH? We are talking about re-habs aren't we? Unless you have multiple crews lined up, you could be treading dangerous ground to try more than one property at a time. I guess as long as each property is completed before starting the next and one does not mind having vacant property sitting idle, multiple purchases are an option. I have never been fortunate enough to be comfortable with vacant property.
I use my own money for the rehab but finance the property purchase. If I had adequate funds I might do it differently though.
It's obvious that how you handle your purchases is going to depend on your strategy as mentioned above. In my own case, I will usually buy the property with cash because I get a better deal. You can sometimes space out the closings which will help if you buy properties about the same time. I will then refinance a property if I am going to keep it as a long term rental to free up my cash. From purchase date to having the property rented has always been 3 months or less for me. Selling has been more unpredictable, but if I feel like I may be getting more things in the air than I can comfortably juggle, I can always sell a house quickly if I am willing to give up a good portion of my profit.
I think personal and professional tolerance is a factor with using OPM and/or Cash. We do both depending on our ROI expected, time, and exit plan on each property.
If we use personal cash we always pay ourselves back first.