Lets face it, few lenders are going to say, ” oh you don’t want to make a down payment, well that’s fine, here’s a bunch of money, should cover the full cost of your project,” So to get your next flip fully funded, more than likely you’ll need a second loan.
To get 100 percent of your costs covered you need a way to bridge the gap between your first loan and the total cost of your project, how do you do this? Seek out gap financing, which is just what the name says. This type of loan bridges the gap between a project’s cost and the initial loan amount.
A gap loan is like taking out a second mortgage on a rehab project, which means your gap lenders in second place if you default. Do you think the resale value of a half-demolished home is going to pay off both loans? Probably not. For this reason, gap financing usually entails a fixed split of the profits upon resale. So, gap financing then might not sound like the best 100 percent financing method out there. What’s another option?
You’ve heard of credit lines. If you have a sufficient credit line, you can cover the full cost of your project without spending any of your own money.
But getting a credit line to cover the cost of tens or hundreds of thousands of dollars in repairs is no easy feat. But, if you follow a few basic principles, you might not even need a second loan to cover the full cost of your next project.
When it comes to flips there a couple of fixed variables in the equation, which are pretty much beyond your control, you can’t control the amount of money your lender is willing to offer you, and you can’t control the cost of rehabbing the property.
To get your loan to carry the total cost of your project, take the maximum amount of financing available and subtract the cost of your rehab to determine your maximum allowable offer:
Max loan amount (ARV or LTV%)- rehab cost= MAO
So if a lender is willing to front 70 ARV on a property worth 100,000 after repairs, and your rehab budget is 30,000, you subtract that from the 70 K the lender offers you, giving you a max offer of 40. If you manage to secure this property for 40, 40+70= your entire project is paid for by your initial loan.
So, get the best estimate of the amount of financing available to you and calculate the total cost of your project, subtract the two and then put in a bid for that amount. It is as easy as that.
This method isn’t foolproof, what if the seller doesn’t agree with your offer? Negotiate the selling price down, and then use a small credit line or gap loan to cover the difference.
So not spending a dime on your next flip is in your control if you follow these three easy steps:
• Determine MAO based on max financing available and your projects cost
• Get the seller as close to that number as possible
• Use gap funding or a line of credit to make up the difference
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.