The Science of Flipping - Never Use Your Own Money

Episode Date: January 25, 2021

Never Use Your Own Money

What is up, everybody? What is up? Welcome back to the Science of Flipping. I am your host, Justin Colby. And if you have not yet, you are making a mistake not heading over to YouTube right now and checking out my channel, Justin Colby on YouTube. I drop a video a day all about business, real estate and entrepreneurship. So make sure you head over to youtube.com forward slash Justin Colby, subscribe to my channel, check out those daily videos. Now this is all about real estate investing. This is all about the strategies, the tools, the processes, the systems to make you not only the best real estate investor you can be, but also the most profitable. That is what it all comes down to. So today, what I want this episode to be about is how, for those that don't know, you absolutely can buy and rehab a property

with none of your own money. In fact, the day before I'm recording this episode, we funded and closed on a mobile home of all things, a double wide mobile home that we are going to actually flip. Now we potentially could keep it as a pretty good rental, but it is in the 55 plus community and it's also a mobile home. And so that's kind of two strikes for me to kind of say, ah, why don't we just flip it? The numbers work well. Now I was able to buy this deal with none of my own money. I was also able to get the lender to overfund the loan. So I had funds for remodel. So how this works is as a private lender, they get a deed of trust against the property in first position. The purchase price, I believe was $79,000. It's going to take roughly $25,000 between

remodel and holding costs between the time I buy it and resell it. And so we'll be all into it for roughly $105,000. And we are going to be selling it for about $159,000. Now, those are great numbers. Now, how did I structure the private lender so that he wanted to do this? Now, preferably you have a lender. Here's the best case scenario, right? You structure the deal where the lender does an interest rate, preferably roughly around 8%. Hopefully you can get somewhere around 6% to 8%. If you go higher, that's okay. It's not the end of the world. Just make sure you know your numbers, right? Make sure you know that it's going to still be profitable after all debt servicing. Okay. So ideally you have six to 8% interest and it is accruing and paid off at the close of your escrow. What do I mean by that? I mean, he does not collect monthly payments.

It accrues on top of the principal during the length of how long you hold it before you sell it. And you will actually pay him that number when it sells to your end buyer. So if it takes four months for you to buy it, remodel it, put it on the market and resell it, your interest payment, let's just make up a number here, is $1,200 a month. Totally making that up. So if it takes you four months, that means there's going to be another $4,800 on the top of your payoff as you sell the property. So you will owe them, in my case, he's all in, my lender's all in for roughly $105,000. In the preferred method, I'm going to have another $4,800 on top of that. So again, rough numbers. When I sell that home, the lender's going to walk away

with $110,000. I'm going to walk away with the remaining. That is your ideal, perfect scenario. Now here's the cool part. It's really all negotiable. I, when I first got started, I really was heavy on partnerships. I would do everything 50 50 cause I wanted my money partners to buy into what I was doing, to buy into me, to buy into the belief. So I gave away a lot. Now that's really expensive money if you really think about it, right? When you're buying properties for $100,000, $125,000, and they walk away with $20,000 of profit, that's incredibly expensive money. And then you can do that with them and for them four times a year, five times a year. I mean, it's their rate of return is 100%. That's too high of interest.

Ideally, you do that to get started. But then over time, you have experience, you have a track record, you can renegotiate. But that's my point. This is all negotiable. I gave you the ideal scenario. Then you might have, there's so many different examples. Maybe you bring in a hard money lender to fund the first position loan. They fund, let's say, 90%. They fund 90% of the first position

loan. Let's just use the example. You're buying the home for a hundred thousand. They're going to fund 90,000. Well, you still need 10,000 to close. Well, that's where you go find another private lender. They will be in second position. They will still have a deed. It'll just be in second position. And maybe their interest rate's a little higher because they're in second position. So maybe they're 10% interest or 12% interest. Now they can also come in with a $10,000 plus the rehab money. So now you have, again, let's say 35,000, they came in with the 10 plus the 25,000 for rehab money at 10% interest. Again, ideally you don't have to pay them monthly and you have all debt servicing at the end in the rears is what they call it. Right.

So it gets paid off at the end, as I explained earlier. But without I mean, you literally there's like eight different strategies I've used over the 13 year career I've had. So it's all negotiable, all of it. I've done an example where a private lender came in with all of the funds, purchase price and remodel. We structured a, you know, management fee at the close of escrow. So we brought home $5,000 management fee on my side. And then we did a 75, 25 split, 75 to the lender, 25% to us. Now that's also aggressive. So that was when I was first getting started, but it got me money immediately, right? So for those just starting out, it's really nice because you get that $5,000 immediately as a management fee that goes into your pocket. And then as the deal goes, you have a 75, 25 split. Now,

looking back at that, I was being way too altruistic, right? I was giving away too much money. At most, then you would do a 50-50 split. But even that, because I'm doing the whole deal, I'm the managing partner, right? I should be getting 60% to 70% still, right? So it is all up to your ability to have the idea of how you want it structured. Obviously, if you're just getting started, you need to make it work for the private lender. But I promise you this, everybody out there, if you're just getting started or trying to scale, there is so much money out there right now. It is crazy. I mean, even to the point where I get emails every single day right now from PayPal offering me six months, 0% interest on almost a hundred thousand dollars.

I could use that money to remodel homes. Now, I don't know if everyone gets that offer. I don't know where everyone's credits at, et cetera, et cetera, but like free money everywhere. So hopefully you guys like this. If you haven't yet go over to YouTube right now, there's daily videos about business, real estate investing, as well as entrepreneurship. And if you haven't yet headed to my website, the science of flipping.com, make sure to schedule a call with me, my team members, see if we can help you overcome your challenges. Again, the science of flipping.com. Hopefully this helped talk to you guys soon. Peace.