Some real estate investors are hesitant to include house flip loans in their house flipping business plan because they fear that the cost of borrowing capital will eat into their profits and lower their ROI. However, if you are a fix and flip investor who is relying strictly on cash reserves to build your real estate investing business, your company's growth trajectory will be limited by the number of successful deals you are able to complete using your own money.
If your business goal is to scale up your house flipping business while keeping the focus on maximizing ROI, you should know that if you are able to increase the number of successful fix-and-flip projects you complete, your cash on cash ROI will increase dramatically.
Here's how:
Maximizing Overall ROI by Increasing Fix-and-Flip Project Volume
One strategy new fix and flip investors might use to grow their business is to accrue the profits from each successful flip and use that accrued cash to purchase and rehab more fix-and-flip projects.
For example, let's say with capital reserves of $600k you purchase two fix-and-flip properties this year. After costs, you realize a 20% net return of $120k, so now you have $720k in capital reserves. Next year, you invest your $720k in three fix-and-flip projects and you receive a 25% net return on that investment ($180k), so the following year you have $900k to invest.
This growth strategy can work for your fix and flip business if
- you are earning enough profit on each fix-and-flip project,
- you are cycling your profits back into your business
- you have the patience to grow your house flipping business at this slow pace.
For house flipping investors who want to scale up more quickly, there is another growth strategy that involves using house flip loans to leverage cash on hand.
Maximizing Cash-on-Cash ROI with House Flip Loans
House flippers whose business goal is to scale up more quickly know there is a critical difference between project ROI (the profit earned per project) and cash-on-cash ROI (the return on the actual cash you invest).
Here is an example of a fix-and-flip project with a $750k purchase price and an ARV of $995k. Let's compare profit and ROI using all cash vs. hard money financing:
--ALL CASHHARD MONEY LOANProperty purchase price-$750,000-$750,000Purchase closing costs-$7,500-$7,500Rehab costs-$80,000-$80,000Borrowed capitalN/A+$664,000Loan down paymentN/A-$166,000Loan costsN/A-$40,393Total cash investment -$837,500-$213,893Property sale price+$995,000+$995,000Sale closing costs-$69,650-$69,650Profit $87,850$47,457ROI (cash on cash)- 10.49%22.19%
In this scenario, the hard money lender puts up most of the capital and shares in the profit. Although the house flipper realizes a significantly lower profit on the deal, their actual cash-on-cash ROI more than doubles.
For this reason, many of the most successful house flippers are high volume flippers who will use a hard money loan to leverage their cash on hand, allowing them to increase their number of projects and substantially increase overall cash on cash ROI.
Anchor Loans is Funding House Flip Loans During COVID-19
During these challenging times Anchor Loans is open for business. We have a fully operational team that is working remotely to continue to fund flips for our clients. With our intuitive fintech and our team of skilled loan processors, we can approve and fund loans in 5-10 business days.
