There are only 2 ways to make money flipping properties:
- Buy at a discount
- Buy at retail and create value
#1 Buy at a discount… flipping properties the easy way
You pay less than the property is worth. You have significant equity the day you buy it. Hard money is a great option if you’re buying at a discount because we lend up to 70% of the retail value.
If you’re getting a good enough deal, you may be able to roll in points, fees, closing costs and interest payments. You “make your money” on the day you buy the property, without doing anything to it.
For example, if you buy a property for $285k that’s actually worth $515k, a hard money lender would lend you up to 70% or $360k at closing, which would cover all your points, fees, closing costs and more. You could certainly flip this property with no cash out of pocket and you could potentially take some profit out on the day you buy it (if you want to pay interest and points on it).
- Current value $515,000
- Maximum loan amount $360,000
- Funding available at closing $360,000
Buying at a discount is the safest, easiest way to make money flipping properties. Naturally, these deals are hard to find. You’ll need to find someone with a strong motivation to sell to you at a significant discount.
#2 Create value… flipping properties the hard way
You pay retail but you plan to redevelop the property to be worth more than it is now. This could be accomplished by building, adding on, subdividing, renovating or some combination. The cash requirement for flipping properties where you create value is much higher because these deals are much riskier for all involved.
It’s also possible to create value with time. You pay retail with the assumption that the property value will go up. No doubt many real estate fortunes have been made on this kind of speculation, but it has more risk. It’s also a longer term strategy than we usually consider “flipping” and it’s not suited to hard money loans.
The problem with using hard money for deals where you need to create value is we can’t lend you more than 70% of the current value at any given time.
For example, you buy a lot in 78704 for $300k. You paid retail but you plan to build a 2,200 square foot house there. The house should be worth $770k, so you qualify for a hard money loan up to $539k.
However, since the land is worth $300k today, a hard money lender can only extend 70%, or $210k at closing. So you need $90k cash plus closing costs to close. You also need operational funds to get construction going before your first draw, which is typically not released until after the foundation is poured.
- New home retail value $770,000
- Maximum loan amount – at completion $539,000
- Land value/purchase price $300,000
- Funding available at closing $210,000
- Escrow to be released in draws as construction is completed $329,000
- Cash required $90,000 plus closing costs plus operational capital
Flipping properties by creating value can be very profitable, but the cash required to use hard money is high. On the plus side, these deals tend to be less competitive since fewer real estate investors have the cash (or the stomach) for them.
Looking at a real estate investment project in Austin? We’d love to hear from you; click here or give us a call at 512-577-6049. We’re very interested in creative real estate partnerships and joint ventures in central Austin. We make hard money loans to Austin real estate investors.