The Pros and Cons of Cash vs Hard Money Loans for Investors
Real estate investors often have many projects going on at once – making the ‘to borrow or not to borrow’ dilemma a common one for fix/flip investors. If you have a plethora of cash on hand to pay for investment properties it may not always be advantageous to do so and here are some reasons to consider.
1. If you put down say $400K on a single home investment property and then need another $100K to renovate it you are now half a million down on cash to go after any other investment opportunities at the same time. Thus limiting your businesses’ growth potential during the time period that project is underway.
2. Although you work as quickly and efficiently at completing a flip as possible, you may not always finish on your allocated timeline, or the property may not sell as quickly as you anticipate it will as real estate market conditions are in constant flux. This leaves you cash poor out on a limb holding an asset you can’t unload and making it impossible to move to the next project.
3. While the funding and interest fees of borrowing hard money or private sector loans may dissuade you, the fact is most fix/flip investors are only in the loan for 6 months to 2 years max and the ROI on the flip usually far outweighs the cost to borrow the capital to do the project.
4. Paying cash means that if something goes drastically wrong or a natural disaster destroys your property mid-flip you have to wait for and hassle with homeowners insurance to get your cash back to start on the project all over again. If you’re under a mortgage you can also carry mortgage insurance which provides advantages that will allow you to recoup your losses faster and move on. It may even protect you from market dips for certain time periods that could otherwise get you less back than what you paid for the property. Thus putting you upside down before you even get started.
5. Finally, if you pay cash for a property you cannot claim the income tax deductions of holding a mortgage; which for investors, holding a portfolio of multiple properties can mean a bid deduction you won’t want to miss out on.
For most fix/flip investors, deciding how to fund a project is taken on a case by case basis and several factors including the cost of the project all-in (meaning how much the property is to buy, the expenditures to do repairs, the cost to hold the property until it sells, Etc.), how long you plan to take to do the flip, how long you plan to hold the property, market conditions, Etc. all come into play.
If you’re about to make a move but need some advice contact an expert here at Center Street Lending to get an insider’s perspective so you can make a smarter investment decision. Loan advisors are available at 949-244-1090 to answer all your questions Monday-Friday 7am-5pm PST.