Lending Your Money vs. Flipping Homes…..What
Makes More Sense?
I
have many friends who are investing in real estate
in today's market, and are making a great deal
of money doing so…but when I thought about
it, I actually began to wonder who is actually
making a better profit or should I see an easier
profit?
Is
it the guy who lends the money or the guy who
buys and flips the home?
Not
sure if you've ever given this too much thought,
but this is what I found when I looked at a recent
real estate transactions from both the buyer and
lenders perspective.
Recently
a client of mine came to me looking for a loan
because he found a great property in south Florida
and had visions of making a great deal of profit.
The
property he was buying was listed at $120,000
and he was able to get the price down to $105,000.
Based
on the comparable sales in the area, this property
was a good deal, with an after-repair-value of
approximately $225,000.
He
came to me looking for a loan of 105,000 +plus
$25,000 for repairs or a grand total of $144,643.00
which included all of his closing costs and fees
associated with the loan. I was able to secure
the financing he was looking for at a rate of
18% and 9 points giving him a monthly payment
of approximately $2,169.65 per month.
Although
he had to put up the initial funds for repair,
he was able to draw down on the rehab funds held
in escrow to complete his repairs.
It
took him approximately 60 days to complete the
entire project and once completed, he put the
property up for sale at 15% less than the going
market price of most homes in the area. He set
his sale price to $225,000 and within 6 months
from the time he purchased the property he agreed
to sell it for $200,000.
Having
the insight to the entire transaction, I was able
to put together a picture of the deal from his
perspective.
Here
is how it looked for him on paper...
Purchase
Price: $105,000
Repair Costs: $25,000
Carrying Costs {6 months}: $13,017.87
Insurance: $900.000
Taxes: $1,800.00
Loan Amount: $144,643.00
Closing Costs: 6% + 3% Broker or $11,943.00
Total Invested: $157,660.87
Realtor Fee: 6% or $12,000
Sale
Price: $200,000 – $157,660.87 – 6%
Realtor Fee or $12,000 = Total Profit of: $30,339.13
Earned over a 6-month period of time.
Once
I determined the buyers profit, I wanted to determine
how much the private equity investor made on the
deal...
Here
is how it looked for the private investor:
Amount
Borrowed: $144,643.00Investor Fees: 6% or 8,678.58
Interest Earned @18% over 6-Months: $9,040.19
Total Return on Investment {ROI}: $17,718.77 or
approximately 12% APR on his money for only a
6 month period of time.
Although
the guy borrowing the funds made a higher return,
he did a considerable amount of work and spent
a lot of time in order to do so. Had the buyer
of this home decided to not do all the work himself,
he could have easily cut his entire profits in
half.
After
reviewing this entire deal and all the details
from both angles I quickly determined that lending
money was realistically the easiest and quickest
way to make a profit. I found out that most "private
money investors" were actually real estate
investors prior to becoming private money investors...and
in most cases, this was the reason they have the
ability to become lenders themselves.
Needless
to say the "private investor" in this
example came back and reallocated the entire amount
he made on this initial investment along with
his profits for the next 6 months....
Here
is how is how he made out on his 2nd transaction
and the return he earned over 12-months.
Amount
Borrowed: $162,361.00 - {Includes Profit + Interest
Received on Last Transaction}
Rate/Mortgage
Fees: 18% for 6 months/Plus 6 points.
ROI:
$24,354.15
Amount
In-Hand {after 12-months}: $186,714.15
Initial
Investment {beginning of year}: $144,643.00
Net
Profit: 186,714.15 - 144,643.00 = 42,071.15
12-Month
ROI: 29%
After
completing this transaction, I calculated the
profit from both deals and determined his 12-month
ROI to be approximately 29% APR.....which is not
too bad considering he never had to get his hands
dirty.
The
best part about both transactions is that his
money was never really at risk, as he borrowed
less than 55% Loan to Value meaning he had 45%
worth of equity in the property in the event the
buyer defaulted on his loan.
After
closely analyzing the approach of these two investors
in today's real estate market from both sides,
I've concluded that lending the money is more
profitable and safer in the long run and definately
requires less stress and strain on the mind and
body.
Many
of you may look at this deal differently, but
It is always good to see the deal through the
eyes of two different types of real estate investors.
For
more information on how you can become a private
money real estate investor for residential and
commercial properties, please contact Mark Battles
at 407-575-4005.
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