A lot of people get stuck on this one. I can tell you this; if your plan is to wait until all your debts are paid off, you have a nice safe cushion in savings, and you’ve saved up enough additional capital to acquire and rehab properties; in most cases you’re never going to be a real estate investor.
In the past 20+ years, I have closed hundreds, probably thousands of properties. But that number is only a fraction of the number of offers I have seen come through. And….., every offer is accompanied by a pre-approval or a proof of funds. Now, a proof of funds isn’t always a bank statement. It can be a letter for a commercial line of credit, hard money, a non property specific line of credit, a home equity line of credit, just to name a few. I get to watch which ones close deals, and which ones don’t.
At different times, different methods, including all the above, cash, and at times a joint venture partner, are the best fit for that specific situation. I like to know them all, and use them like tools in my toolbox. Know the right tool for each job. Again, there is no “one size fits all”.
The following comes from a piece written by Jason Balin of Hard Money Bankers. Hard Money Bankers are good people, and certainly one of the “tools in my toolbox”. I liked what Jason says here, and frankly, I got this as I was working on the content for this page and I thought it said a lot;
After hearing from an investor say “I don’t use hard money, it’s too expensive”, Jason goes on to say “got me thinking about if most real estate investors actually know the cost of the capital they are using”. The chart below gives a simple comparison.
|Bank||Cash||Joint Venture||Hard Money Bankers|
|6% and 1 point, 75% LTC||Your Money||50/50 Split with cash partner||14% and 4 Points, 65% ARV|
|Purchase Price||$ 100,000.00||$ 100,000.00||$ 100,000.00||$ 100,000.00|
|Construction||$ 30,000.00||$ 30,000.00||$ 30,000.00||$ 30,000.00|
|Loan Amount||$ 100,000.00||–||–||$ 130,000.00|
|Financing Points||$ 1,000.00||–||–||$ 5,200.00|
|Financing Costs (Other)||$ 1,500.00||–||–||$ 1,500.00|
|Closing Costs Purchase||$ 5,000.00||$ 5,000.00||$ 5,000.00||$ 5,000.00|
|Cash to Close||$ 37,500.00||$ 135,000.00||–||$ 11,700.00|
|Holding Costs (Financing Carry)||$ 3,000.00||–||–||$ 9,100.00|
|Holding Cost (Other)||$ 2,500.00||$ 2,500.00||$ 2,500.00||$ 2,500.00|
|Gross Resale||$ 200,000.00||$ 200,000.00||$ 200,000.00||$ 200,000.00|
|Resale Costs||$ 13,000.00||$ 13,000.00||$ 13,000.00||$ 13,000.00|
|Net Resale||$ 187,000.00||$ 187,000.00||$ 187,000.00||$ 187,000.00|
|Total Cash Needed For Life of Deal||$ 43,000.00||$ 137,500.00||–||$ 23,300.00|
|Total Financing Costs||$ 5,500.00||–||–||$ 15,800.00|
|All In||$ 156,000.00||$ 150,500.00||$ 150,500.00||$ 166,300.00|
|Back End Fees/Split||–||–||$ 24,750.00||–|
|Net Profit||$ 44,000.00||$ 49,500.00||$ 24,750.00||$ 33,700.00|
|Cash on Cash Return||102%||36%||N/A||145%|
* $200,000 resale value
* 6 Month hold time
* $30,000 Construction holdback from lender
* 6.5% resale costs