If your idea of a successful house flipping investor is someone with millions of dollars on hand to sponsor dozens of fix & flip projects per year, you might be astounded to learn that sort of capital liquidity is exceptional. Successful house flippers usually have the bulk of their own capital tied up in more than one project at a time, and as they grow their real estate investing footprint with more & more projects, they usually work with California hard money lenders for fix & flip loans to finance their deals.
Hard money lenders help house flippers in leveraging their cash:
Often, new fix & flip investors are under the notion that incorporating loan fees & interest payments to the cost column in their house flipping business plan will only negatively affect their Return on Investment. This could be true in some scenarios, particularly if you’re computing ROI on a per-project basis for only a small number of house flips. However, the amount of cash on hand you have to fund your house flipping business directly correlates to your corporation’s growth curve. Being too conservative can drastically slow this growth curve, and your overall ROI will be dramatically lower since you’ll be limiting the number of deals finished.
For example, let’s say you’ve capital reserves of $300,000 and in your market, you can buy 2 fix & flip properties this year. After costs, you realize a twenty percent net return of $60,000 in profit. Now you have $360,000 in capital reserves. Next year you invest your $360,000 in 2 more projects and obtain a 25 percent net return of $90,000, meaning you then have $450,000 to invest the following year. And so on…
This business expansion strategy can work for you if you’ve the desire and patience to grow your house flipping business more slowly.
Hard money lenders help house flippers retain their cash reserves and leverage this cash on hand to obtain faster growth:
Another advantage of using borrowed capital from hard money lenders in California is that you can hold on to cash reserves in case of operating expenses you didn’t see coming. Making use of a hard money loan means you can hang on to your cash & allow the borrowed capital to do the hard work. In a surprising emergency, loan costs can be a small price to pay to avoid the disaster of being overstretched because of a surprise hit on your cash reserves.
If your business objective is to grow your organization fast and tactfully while maximizing your cash on cash ROI, increasing the number of successful house flips means your ROI increases drastically as well.