The Science of Flipping - Episode 38: Whose money should you use? | Real Estate Investing Podcast

Episode Date: June 13, 2014

document.addEventListener("DOMContentLoaded", function () { podlovePlayer("#player-5eb5ab320351f", "https://thescienceofflipping.com/wp-json/podlove-web-player/shortcode/post/573", "https://thescienceofflipping.com/wp-json/podlove-web-player/shortcode/config/default/theme/default"); }); <p> document.addEventListener("DOMContentLoaded", function () { podlovePlayer("#player-5eb5ab3203573", {"title":"Real Estate Investing Podcast u2013 Episode 38: Whose money should you use?","subtitle":null,"summary":null,"duration":"","poster":null,"chapters":"","transcripts":"","audio":[{"url":"http://thescienceofflipping.com/wp-content/uploads/2014/06/Podcast-Episode-38.mp3","mimeType":"audio/mpeg","title":"AUDIO/MPEG","size":0}]}, "https://thescienceofflipping.com/wp-json/podlove-web-player/shortcode/config/default/theme/default"); }); <img src="https://thescienceofflipping.com/wp-content/uploads/2013/09/itunes-justin-colby-150x150.png" alt="itunes-justin-colby" width="150" height="150" /></p> Justin Colby talks about the choices of money you might be raising for your flips. There is debt and/or equity and Justin Colby provides insight on what is the best money to raise.

Welcome to the Science of Flipping Podcast. I'm your host, Justin Colby. Welcome, welcome, welcome everybody to the Science of Flipping Podcast. I am your host and creator of this podcast, Justin Colby. I'm excited that we're here today, guys. Today's episode is 38, so thank you for listening to me for this many episodes. It's been a blast all the way through. If this is your first time to the podcast, get over to thescienceofflipping.com. Not only will you be able to get what would be considered probably the number one or most important e-book on the market, which is the 15 most costly mistakes you can make right now in today's market. But once you go in there and you download that e-book, I will start to send you emails about our free webinars

and free content that we give out on a weekly and monthly basis. So get over to thescienceofflipping.com, get your free e-book, but also I will then be emailing you every time that we put on an incredible webinar or a free material for you guys. So get over to the website. My emails have been blowing up because I'm putting on a webinar and people are asking me a little bit more about working directly with me or my team and we are happy to facilitate that

so if you're interested you can go over to thescienceofflipping.com go ahead and hit the coaching tab um and fill out information. We're happy to get back to you. My personal assistant will get right back to you. Or you can email us directly at info at thescienceofflipping.com. And my personal assistant will get right back to you if you want to know more about working with me personally and my team. So that is the formalities, guys. Let's kind of get into the subject matter that I'm finding incredibly important. So are my business partners.

In this podcast, Podcast 38, what I'm really going to teach is when to use the right money. As fix and flippers, a lot of times we tend to always say, okay, I want to go get a real low interest rate and that's really what I want to do. And I don't want to use partners because they take 50% or even sometimes more. And today, guys, I want to really talk to you about depending upon what market you're in may sway you to use one lender over another. It may sway you to use one lender over another primarily because if it's a rising market and it's going up quick, you're not looking to hold that flip for very long. You're in there, you buy it right, you listen to all my other podcasts talking about how to systemize your rehab so you're in, you're out, and you're efficient,

and it's a good rehab, and you're out of that home in 120 days. Maybe a little bit more if you're in a market that it takes longer, in an older market, like if you're in New York, or if you're in Connecticut, or if you're in parts of California, it might take a little bit longer, but you want to be in and out of that flip, right? So in that scenario, when the market is allowing you to get in and out of the flip really quick, you are correct in assuming the style or type of money that you would want would be an interest rate or a debt style money where it's a loan that might have 10% or even 12% interest on it

and that you're going to turn it over in 120 days, 150 days, something quick. That is going to be the style of money that you are going to want to be able to use in that style market because the market is hot, the market is moving, which right now is happening in a lot of different places. I know there's a lot of listeners out there where their market is steaming hot, it's moving, you got a running gun and get top dollar for the property, then you will want to use what we call the debt style of money, where it's just an interest rate. Now, in that case, when markets start to slow down, or is slowing down, or has slowed down,

you might want to think about more of an equity partner. And I bring that up, and it probably goes against what most gurus would probably teach you, but I bring that up because if you go into a deal and it takes a little bit longer than you thought, or the market is slowing down and the profits aren't as high and you can't sell it for top dollar and you need to take a little bit of price reductions or the city catches you maybe not doing something right and red tapes your home and you're into the deal for a month or two longer, the reason why an equity partnership at that time would be best is because everyone still wins. Everyone still wins because there's no monthly debt accruing every single month that you would have to pay out or debt service. So you're not going to have to cut a check each and every month

when the market maybe is slowing down. Or if you're wondering, I don't know if it's quite as hot as it used to, you're trying to be a little bit speculative about how really hot is it what happens if it falls short what happens if it doesn't keep going up if you're in that market or you're feeling like this is maybe happening you might consider having an equity partner because even if you have to let's say let's give you an example okay so you have about a $60,000 spread and a flip that you did now if you have a $60,000 spread you're probably in a little bit higher of a price point your debt servicing might have been I don't know, $2,000 to $2,500 a month, depending. And what happens in that

scenario, you're cutting out those checks, $2,000, $2,500 a month, every single month. And something happens, the market shifts. So when you thought you had $60,000 in profit going in your pocket, you now have to maybe make a pretty drastic price reduction by $10,000, $15,000, or even $20,000, depending upon what's going on in your market. That very well could happen. And if you have an equity partner and not a debt partner, well, that's still a profitable deal for both

of you because there's no interest being paid out but if you have a debt partner and not an equity partner and you're in this deal and it's not selling and you got to do these price drops and something happens and you hold it a lot longer and you're cutting two2,000 or $2,500 checks, that eats up all your profit. And those checks might be more every single month that you might be cutting. And that'll eat up all your profit. So the reason why I wanted to put this podcast out for all my loyal listeners, and thank you again for being so great, is because a lot

of times these gurus will tell you, you know, you want to find the cheapest money possible. And I'm not saying they're wrong at all, but I want everyone that listens to what I do and how I do it to understand sometimes there is a good opportunity to have an equity partnership where someone actually will be your partner and not charge you interest, but they'll take maybe 40 or 50% of the gross income or profit that comes off of that. And sometimes that is not a bad thing. And so I put this podcast out there to let you know, always, always be searching and raising money and never deny any type of money.

Because the next point that I'll bring up very briefly is when you are in a high volume game, like we have been here in Phoenix for so many years, and you're doing so many deals in the last two years, we've done 150 deals flips in the last two years. And when you have that type of volume, you never want to run short on money. And sometimes just because it's a smoking deal and maybe one of your lenders doesn't have any more money, but you have another lender on your left-hand side that is a lender but likes to do equity deals, partnership deals, go 50-50, even though it might not be a deal, you don't want to pass up a great deal.

You always want to be able to take that deal down. So even though you're not very excited about that style of money, which I can understand, I would rather buy the deal than not buy the deal. And that's really why it's important to not just disregard people who say, okay, well, I only want to be partners on our deals. Don't just disregard that because you may need to call that person one day. And the last point I'm going to bring up here is how to structure that deal so you don't feel like the equity partner is making more than they should. And a lot of times us as flippers,

we often feel like the reason why we don't want to take a equity partner is because they make a lot more than what an interest partner would make, right? Or a traditional lender, a debt lender, where they'd be making 10 or 12% interest on their money, partner deals oftentimes make us as the flipper feel like the lender is getting the better end of the stick. Well, let me bring just an idea to you because we have done it several times with several different lenders, more than several times actually, but we arrange an ability or a way to get paid not only when the deal sells, but also when it funds, when you're buying the deal.

And what you do here, and I've mentioned this in past podcasts, but really what you're going to be doing here is you want to take what's called a management fee, which can be paid through the HUD, which can be completely legal, and that's you and your company getting paid maybe a $5,000 or $10,000 management fee up front at close, which is non-refundable. So what that does is makes your lender fund an extra $5,000 or $10,000 above the closing price, which goes into your pocket. And now maybe you want to make it feel a little bit more fair. So maybe instead of a 50-50, you give that lender or equity partner, okay, lender and equity partner, 60% of the deal or 65% of the deal at the back end. So when the thing sells, they get 65 or even 70% of the profits, depending

upon what market. I would keep as close to 50% as possible, but depending upon the market, you know, you got to run your numbers, right? And your projected profit. But you take a $5,000 or a $10,000 management fee up front. And on the back end, let's say you have a, whatever it may be, $30,000, $40,000, $50,000 profit when you sell, and they might get 65% of it, and you get 35% of it. And really, at the end of the day, you made money on both sides. And that has helped keep us afloatat at times because we were doing so many,

but all the flips were closing, you know, at the same time. And all of a sudden we need to get some paychecks coming in. That fee up front helped us collect some paychecks. Now the most ideal way to structure that is take your five or 10 grand up front, but also make it a 50-50 deal. That would be most ideal. So you can say, hey, listen, you're really just wiring in money. I got to do all this work for the next three or four months. To do that, to accept that partnership, we need to have a management fee on the front end. And it doesn't have to be a ton, five grand, maybe 10 grand, somewhere in the middle. But we need to have a management fee because we need to be able to put some money in our pocket you know for the next 120 days or whatever that

may be okay so that can be another way you structure an equity partnership or maybe it is 50 50 but you get a management fee or maybe a 60 40 they get They get 60, you get 40, but you get that management fee up front, which usually balances out to 50-50. So guys, I just really don't want anyone thinking, I don't want to raise any more partnership money. Well, the partnership money at times can be very advantageous. It can be very advantageous at times.

When the market is skyrocketing and you're going up as fast as you can go, yes, I would probably always choose debt money, meaning debt servicing, so you would have to pay the note every single month. But when the market maybe is getting a little iffy, maybe you see some signs of slowing down, maybe you see the economy changing, at that point, maybe I would prefer to have that partner, that equity partner, that because you don't have any interest, makes it a lot harder to lose on a deal. Not impossible, not impossible, but that spread really stays in there because you're not eating it every single month by cutting checks. So for those of you out there, always keep your mind open about what type of money you're raising because you never know when it's going to come in handy. And at the end of the day, if you don't have any debt money, meaning just your typical loan with

interest rate, but you have someone who's willing to partner with you, get the deal done. Don't be foolish and think, oh, I don't want to partner and give away 50%. Just get the deal done. Put some money in your pocket and go on to the next deal and don't stop raising money. Never stop raising money. We never stop raising money, constantly raising money. So that's what I got for you guys today. Never turn a blind eye to any style of money. You know, obviously, depending on the economy, choose the most advantageous one,

but never shoo anyone away that has money for you guys to do deals. That's what we're here to do. This podcast is all about showing you systems, opening up your mind so you can live the life you want to live, the life by design as they say, right? I just spent a week in Mexico. I spent four days in Chicago. I have a wonderful life.

Business is booming. You really want to keep these systems, and this is what this podcast is all about. This is what we try to teach you each and every week, and maybe sometimes it's a true system within your fix and flip. Maybe sometimes it's just a mind frame like we're talking about today about when to accept what type of money. But that's what we're trying to do here for you guys. I appreciate you guys always showing up, being loyal. You guys kick butt. The thing about this industry, you always have to take action.

I'm always looking for action takers. Go out there and take action. Do it now. Don't overthink about it. Get in the game and take action. I'm always looking for action takers. Go out there and take action. Do it now. Don't overthink about it. Get in the game and take action. Again, if you need anything from me, want to work closer with us, go ahead and shoot us an email at info at the science of flipping or go on to the website, the science of flipping.com. And there's a little coaching tab there that you can fill out and my personal assistant will reach out to you but that's all i got today guys i appreciate you guys listening that's it peace