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Last week I was discussing contracts, clauses, and creating win win deals. That article is especially relevant for the real estate entrepreneur. Let’s say you’ve made some moves and found a great deal. You’re now in business, but the deal you found comes with some carrying costs. Carrying costs are the price of doing business, and are pretty common in lease options, flipping, and real estate development deals. These costs may include rents, utilities, maintenance/repair, inventory, salaries, construction, etc. In this article I will give an example of how to utilize creative financing to cover the carrying costs involved with flipping property. The idea behind this method is to buy enough time to get the property to the closing table and capitalize, without having to put any substantial amount of money down.
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The Little Pocket Investors
Credit cards are like little investors we keep in our pocket. This concept is referenced in “CREATIVE FINANCING AND 3 EXAMPLES OF OPM”, where I also mentioned that credit cards are best applied towards good debt. There is always a chance of unpredictable outcome with investments, and I always suggest seeking out alternatives to making the deal, other than leveraging credit and playing with debt. If you are unable to create a valuable partnership with a private investor who could finance the deal, then this “good debt” method to flipping property may be a nice plan B… depending on the deal. So here are the three steps to building up your pocket investor leverage:
1. Get yourself at least three credit cards from different banks (Visa, Master Card, Discover, Etc.)
2. Keep all three cards active, and pay them off every month before interest
3. Every three to six months phone the card’s providers for a review and negotiate a credit limit increase
It also wouldn’t hurt to try negotiating a lower interest rate as well, but the credit limit is your main priority. You will not be paying any rent (interest) for the use of this money, like you would with a private lender or a traditional bank mortgage, but just for those “what ifs” a low rate = a softer blow to your profits. It is very important that you maintain a good credit score, and it would be a great benefit if your credit score qualifies you for platinum cards, before you apply. You want to get cards that permit the highest credit limit, and preferably ones that offer low transfer fees.
Flipping the Numbers
There are techniques to finding good deals that I’ll cover later, but let’s say you have found a potential deal you are really interested in making a move on. Most properties that get flipped are fixer-uppers, and maybe even distressed. I would suggest avoiding the latter and focus on those fix and flips, for this method (unless you are really confident). There are two figures you will need before you execute your deal, so do not forget to utilize contingencies in the contract so you can get all your due diligence done. It is very important that you do not go over budget using this method, and that you make your money on the buy. You will know this by first finding the ARV (after repair value). Negotiating a large enough spread between ARV and the sales price so that you will have plenty of room to cover not only the contractors, but also any transfer fees accrued during the projected time needed to carry the property to the next buyer. You should have an idea of what your bottom line will look like before you even get to the closing table to purchase the property. This method is a “cash deal” creative financing method. You are not applying for any mortgages or refinancing. Here are the points to this method:
· You are only investing in property you can buy out right using one of your credit cards
· You already have a contractor lined up who will also be paid (not all upfront though) via card
· You are transferring the balance of the credit card to one of your other two credit cards each month before interest hits (note: keep a stiff eye on the amount of transferring fees that accrue as you rotate the balance, this is what will eat away at your bottom line profits)
· You sell the property once the project is finished and pay the entire balance of the card off with cash, and whatever is left due to your contractor, and bank the rest.
- If you are having a really hard time finding a buyer for the property, you could rent the property, or set up a lease option deal, as a couple alternative exit strategies to retain the value of the deal.
Credit cards are like little investors we keep in our pocket. This concept is referenced in “CREATIVE FINANCING AND 3 EXAMPLES OF OPM”, where I also mentioned that credit cards are best applied towards good debt. There is always a chance of unpredictable outcome with investments, and I always suggest seeking out alternatives to making the deal, other than leveraging credit and playing with debt. If you are unable to create a valuable partnership with a private investor who could finance the deal, then this “good debt” method to flipping property may be a nice plan B… depending on the deal. So here are the three steps to building up your pocket investor leverage:
1. Get yourself at least three credit cards from different banks (Visa, Master Card, Discover, Etc.)
2. Keep all three cards active, and pay them off every month before interest
3. Every three to six months phone the card’s providers for a review and negotiate a credit limit increase
It also wouldn’t hurt to try negotiating a lower interest rate as well, but the credit limit is your main priority. You will not be paying any rent (interest) for the use of this money, like you would with a private lender or a traditional bank mortgage, but just for those “what ifs” a low rate = a softer blow to your profits. It is very important that you maintain a good credit score, and it would be a great benefit if your credit score qualifies you for platinum cards, before you apply. You want to get cards that permit the highest credit limit, and preferably ones that offer low transfer fees.
Flipping the Numbers
There are techniques to finding good deals that I’ll cover later, but let’s say you have found a potential deal you are really interested in making a move on. Most properties that get flipped are fixer-uppers, and maybe even distressed. I would suggest avoiding the latter and focus on those fix and flips, for this method (unless you are really confident). There are two figures you will need before you execute your deal, so do not forget to utilize contingencies in the contract so you can get all your due diligence done. It is very important that you do not go over budget using this method, and that you make your money on the buy. You will know this by first finding the ARV (after repair value). Negotiating a large enough spread between ARV and the sales price so that you will have plenty of room to cover not only the contractors, but also any transfer fees accrued during the projected time needed to carry the property to the next buyer. You should have an idea of what your bottom line will look like before you even get to the closing table to purchase the property. This method is a “cash deal” creative financing method. You are not applying for any mortgages or refinancing. Here are the points to this method:
· You are only investing in property you can buy out right using one of your credit cards
· You already have a contractor lined up who will also be paid (not all upfront though) via card
· You are transferring the balance of the credit card to one of your other two credit cards each month before interest hits (note: keep a stiff eye on the amount of transferring fees that accrue as you rotate the balance, this is what will eat away at your bottom line profits)
· You sell the property once the project is finished and pay the entire balance of the card off with cash, and whatever is left due to your contractor, and bank the rest.
- If you are having a really hard time finding a buyer for the property, you could rent the property, or set up a lease option deal, as a couple alternative exit strategies to retain the value of the deal.
