Late last year, a new client was referred to us by one of our repeat borrowers. The client was having a hard time finding a property for his first flip.
He had been getting outbid on everything he was interested in. A property came to our attention through a wholesaler, Marcela Alcala, that we do a lot of business. We had started the loan on this property in Castle Hills, San Antonio, for another borrower who had to back out of the deal the day before closing. We decided to send the deal to our new client, who wanted to move on it immediately. Since we had already done our underwriting on the property, we were able to close the loan for our new borrower the next day. He ended up purchasing the property for $232,000.
Our client decided he was going to spend $40,000 to renovate the property. Our appraisal (and the wholesaler’s estimated ARV) showed a value of $350,000 after repairs were completed. We did the loan for our client at $244,800 (90% LTC), and our client put $27,200 down as equity out of pocket. The loan was done at an interest rate of 10% annually, with 2,25 points and $385 in fees.
After a 3 month rehab, our client listed the property for nearly $20,000 over the appraised value at $369,900 and within 24 hours had an above asking offer of $380,000.
Our client made a $108,000 gross profit on this property.
After backing out Realtor fees, closing costs, and financing costs, and other holding costs, he probably walked away with $70,000-$75,000 in net profit. Based on his down payment and net profit, his Cash on Cash return was over 275% ($75,000/$27,200). This is a measurement that investors use to judge how hard they are putting their money to work for them. Basically, it means that this investor increased the money in his pocket by 3.5 times. To put it another way, if he had bought this property in cash, his cash out of pocket would have been $272,000. When he turned a $75,000 profit, that would be a Cash on Cash return of 27.6% ($75,000/$272,000). That means that by leveraging his cash and taking on debt for 90% of the project, our client was able to make his money work nearly 10 times as hard for him.
Not only is his money working harder for him by taking this approach, but he also has the ability to scale his business even faster. By taking that money and spreading it over multiple down payments instead of sinking it all into one project, he can do more deals at once. In this example, he would have had the ability to do another nine deals simultaneously!
Now, he can take his $75,000 profit and do 4 deals on the next round with the same amount of cash he started with, instead of having to do 4 projects all in cash in order to make enough profit to do 2 projects at the same time!
We want to partner with you on your next deal. Do you have a property you are considering flipping or investing in? Let’s talk.
Feel free to email us at email@example.com. You can also call or text 210-941-3916.