The Disadvantages of 100% Financing Fix and Flip Deals
There are no money down financing options available. I am a mortgage broker who specializes in real estate financing for investors. I even offer Hard Money. I get calls nearly everyday from people who want to put no money down to purchase and rehab properties. They have been taught or they just believe it is a good idea to invest with no money and let the lender take all the risk. Yep,if you invest no money you have nothing to lose. The lender takes all the risk. Really that is what it is all about. Invest no money and get a great profit for doing so by purchasing, renovating and selling distressed properties.
The lender takes all the risks.
You make all of the profit.
This sounds very good.
Unfortunately, it is not really the best option for some people. The reality no option is the best option for everyone.
Some would say if you have cash to buy and rehab the property then sell it with no financing at all that is the best option.
Really it is not. For instance, if you had $100,000 and it took all $100,000 to complete a fix and flip then sell it for $150,000 making a gross profit of $50,000 with no financing costs you did a great thing. You did.
But, a better solution is to use $30,000 for down payment and do 3 deals. If the financing costs was $10,000 per deal you would still net $40,000 per deal for a total of $120,000 profit. Which would you prefer – $50,000 profit or $120,000 profit
The same is true for 100% financing. Assume you had a lender give you 100% of the money needed say the same $100,000 and assume 18% interest and 10 points and standard closing fees (real numbers) you would pay over $20,000 and net only $30,000. Is that a good deal. Maybe, Maybe not. It depends on your options. Simply put if you have money for down payment you would make $40,000 per deal versus $30,000 per deal.
So really, all three options have their advantages and their disadvantages.
Option One invest all cash for purchase rehab and yield the greatest profit per deal.
Option Two invest 30% (more or less) yield less per transaction but have money to do more deals yielding a greater total profit.
Option Three invest no money yield the least dollar amount return but the greatest rate of return.
Which is the best option for you? Lets assume in a one year time period in option one your return is 50%, option two it is 133% ($90,000 invested for $120,000 profit) and unlimited return in option three because you invested nothing.
If option one or option two are not options you are forced to choose option three yet it is the greatest return on your investment even though it is the least return.
No Money Down
This is the least return but the greatest per cent return. So if you have no option and you just hate the thought of paying such high fees. Do one deal. Make some money to put down on the next deal so you would make more money. Or just relish in the fact the lender is taking all the risks by investing in you since your are not investing any money. Make less money but the greatest return on investment, because you have no financial investment. Some people only do deals like this and they make lots of money using other peoples money. Finally, consider the Hard Money Lender your cash partner. If you had a partner who put up all the money what per cent would you share with them.
The choice is yours. The object is to fix and flip some properties and make great money and an awesome living.