If your idea of a successful house flipping investor is someone with millions of dollars on hand to fund dozens of fix and flip projects per year, you might be surprised to learn that kind of capital liquidity is rare. Successful house flippers often have the bulk of their own capital tied up in multiple projects at once, and as they grow their real estate investing footprint with more and more projects, they often partner with hard money lenders for fix and flip loans to finance their deals.
Hard Money Lenders Help House Flippers Leverage Their Cash
Often, novice fix and flip investors are under the impression that adding loan fees and interest payments to the cost column in their house flipping business plan will only negatively affect their ROI. This could be true in some cases, especially if you are calculating ROI on a per-project basis for just a few house flips. However, relying strictly on your own cash reserves to build your house flipping business means your company's growth trajectory will be significantly slowed, and your overall ROI will be significantly lower since you will be limiting the number of deals completed.
Let's say you have capital reserves of $300,000 and in your market, you can purchase two fix and flip properties this year. After costs, you realize a 20% net return of $60,000 in profit. Now you have $360,000 in capital reserves. Next year you invest your $360,000 in two more projects and receive a 25% net return of $90,000, meaning you then have $450,000 to invest the following year. And so on...
This is a business growth strategy that can work for you if you have the patience, and the desire, to grow your house flipping business more slowly.
Borrowed Capital Can Give a House Flipping Business More Flexibility
To grow your house flipping company more quickly, another option could be to leverage your $450,000 with borrowed capital from a hard money lender. Let's say you borrowed $1.25 million, giving you the means and the flexibility to compete for deals (some hard money lenders even have a Close as Cash Bridge Loan program that allows you to compete with cash buyers), and with your $1.25 million you can now purchase eight homes. Factoring in your loan costs, your average per project ROI may drop a couple of percentage points, but your cash on cash ROI will jump significantly -- meaning your own cash works harder for you when leveraged with borrowed capital.
Hard Money Lenders Help House Flippers Hold on to Cash Reserves
Another benefit of using borrowed capital from hard money lenders is that you can retain your cash reserves in case of operating expenses you did not see coming. Using a hard money loan means you can hang on to your cash and let the borrowed capital do the hard work. In an unanticipated emergency, loan costs can be a small price to pay to avoid the catastrophe of being overextended due to a surprise hit on your cash reserves.
If your business goal is to grow your company quickly and strategically while maximizing your cash on cash ROI, increasing the number of successful house flips means your ROI increases significantly as well.
Read our article Why Use a Loan to Flip a House to see how the numbers add up and discover more excellent reasons successful house flipping investors seek hard money lenders for project financing.
If you are wondering how to choose between hard money lenders, another excellent article to check out is How to Decide Between Hard Money Lenders for House Flipping.