Financing Your Flips Using the 70% Rule
Most people believe that in order to buy Real Estate and Flip That House you need a lot of money. Most people who actually buy property will indeed put a large sum of money into it. But what most people don’t realize is that while it may take money to buy property, it doesn’t necessarily need to take your money, especially if you learn about "Hard Money" and the "70% Rule".
A lot has been written about "No Money Down" real estate transactions. While many of the techniques taught about this subject are doable, for many people they are very difficult. It wasn't until I started getting into flipping houses for fun and profit that I heard of the best source of funds there is for financing flips, and that is "Hard Money".
I had heard of Hard Money before but it sounded extremely risky to me as my mind conjured up images of heavyset men breaking knee caps when you didn't pay on time. It is nothing like that in reality. Plus, it frees you up to do many deals at one time. In fact that is the secret behind Armando Montelongo and how he is able to flip 30 houses in one month.
Say you have $10,000 and want to invest in real estate. You find a property that you can purchase for $100,000. You decide to purchase the property and put 10% down or $10,000 and conventionally finance $90,000. So now lets say that six months pass and you are able to sell the property for $125,000 making a nice profit of $25,000. On the surface one might say that you made a 25% profit. In actuality though, given that you only put $10,000 into the deal you actually made 250% profit on your money. And when you annualize the profit you made a $500% annualized return on your money. But the problem here is that once you put your $10,000 into the deal, you have have no other investment money to do another deal until this one sells. Plus, you just used all of you money for the down payment. Where is the money for the fix-up coming from?
Now look at the same deal only this time you are able to put only $1,000 down. Given the same term, 6 months, and same sales price, now you are looking at a 2500% profit and a 5000% annualized gain. But what is better about this, you could conceivably do 10 projects like this with your original $10,000.
Take the same deal again only this time you put No Money Down. Now your percentage of return becomes infinite – it doesn't even calculate. What's more, if you still only have the original $10,000 to invest but you are purchasing property with no money down, you aren't limited to only one deal. You could conceivably do as many deals as you can find.
With Hard Money this is not hard to do. But you will need to learn about the 70% rule. This is mainly because hard money lenders will lend you 70% of the ARV every day of the week. What is ARV you ask? ARV is the After Repair Value of a property.
The 70% Rule
Simply put, the 70% rule states that you never purchase a property for more than 70% of its ARV - less its fix up cost.
Lets say that you found a property that is in need of a little work, but once it has that work done and it looking good again it is worth $100,000. Also, the owners, who have become motivated sellers and recognize that they would need to put some money into it to get full price, are willing to sell it to you quickly at a discount. You know that your hard money lender will lend you 70% of the ARV which in this case would be $70,000 ($100,000 x 70%). Only this property needs about $10,000 of work to bring it up to full price value. In your calculations, you subtract $10,000 from the $70,000 that the lender is willing to give you and you get $60,000. That is your purchase price.
You make your offer of $60,000 to the sellers, they accept and you finance the deal with hard money. The lender pays the seller $60,000, leaving $10,000 for repairs which you can now complete without using any money out of your pocket. After the repairs are complete, you Flip the property for the $100,000 and realize a gross profit of $30,000. Subtract lender financing costs, points and realtor commissions you will actually end up with closer to $20,000, but still a nice profit.
You have now completed a No Money Down real estate deal using Hard Money. Using the 70% rule you do these deals as fast as you can find them. What more incentive do you need to Flip That House.
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