Economics and Benefits of Leverage in Flipping Homes

Good Morning All!

 

I wanted to run through some of the economics and benefits of leverage in Flipping Homes this morning.  

 

When I started flipping houses over a decade ago the financing options available were very limited.  I basically needed a minimum of 20% down and I also had to pay for all the improvements out of pocket.  There were only a few options in town and both charged a $900 doc fee and charged 18% annualized and both had very similar terms.  

 

This meant that when I bought a house to flip at the courthouse steps for $100,000 that needed $18,000 in improvements, I would need approximately $45,000 to flip that house.  This amount would cover:

-The down payment of $20,000

-Improvements of $18,000

-$900 doc fee

-$6100 to cover interest, utilities, insurance, etc… 

 

If I purchased the property to fit my own underwriting requirements, we would ideally sell the property for $150,000.  This would mean we would make a return of around $16,000 after all the selling costs were accounted for.  

 

$16k return on an outlay of $45k.  Not a bad cash on cash return especially if you do that 3 to 4 times per year. 

 

What is great about flipping houses in todays market is that our lending options have evolved to much more beneficial terms than a decade ago.  Due to my experience and background along with my track record, I have developed relationships with two separate hard money lenders who will lend up to 90% of purchase as well as up to 90% of rehab in AZ and CO.  They charge 2 points and only charge a 10% to 11% interest rate. 

 

So we can clearly understand how this affects our ability leverage capital, here is the same scenario as the flip highlighted above:

 

-Down payment on purchase of $10,000

-Down payment on improvements of $1,800

-Points on the loan $2124

-$5,000 to cover interest payments, utilities, insurance, etc…

 

Therefore to flip that same property today utilizing my contacts and relationships would require approximately $19,000 capital investment, whereas the same property would have required over twice that amount of capital when I started.  

 

What is even better is that the profitability of both of these examples essentially stay the same, therefore the cash on cash return increases dramatically.  

 

To review, the use of these financing options allows you to increase volume as well as return, and increase your return on investment substantially.

 

Both of these lenders will provide these financing options to properties I either sell wholesale or properties I personally take down in Joint Ventures with partners.  

 

If you are interested in my wholesale properties or JV opportunities.  Make sure you are on my buyers list by signing up at www.win-wintransactions.com or PM me your email or questions.  

 

Have a great Monday and get out there and take some ACTION!

 

John May

President

 

Win-Win TransACTIONS