Over the years, First Capital Trust Deeds has received this question, “How much down payment is required to flip a house with a hard money loan?” This blog post answers that question for the first-time house flipper and the experienced house flipper who has done 10+ projects.
If you’re considering flipping a house for the very first time using a hard money loan to finance the project, the general rule of thumb for your down payment is 20-25% of purchase price. On top of the down payment, a first-time investor will need to cover loan origination fees of approximately 3-4% of the loan amount plus standard closing costs (Title, Escrow, Taxes, Recording, Etc) of another 1.5% of purchase price.
Example of a Fix & Flip Scenario for a First-Time Investor
A first-time investor is buying a house for $300,000 using hard money financing. The new loan amount will be $225,000 (75% Loan-To-Value (LTV)) with loan origination fees of 3% and fixed closing costs of approximately $4,500.
$300,000 Purchase Price
-$225,000 Loan Amount (75% LTV)
-$6,750 Loan Origination Fees (3 Points)
-$4,500 Closing Costs on Purchase (1.5% of Purchase Price)
=$86,250 Total Cash-to-Close
In addition to the $86,250 cash to close, some hard money lenders will require first-time house flippers to show liquid assets to cover the first six months of payments, including taxes and insurance along with enough cash on hand to cover the entire renovation budget, as provided prior to loan approval.
In the $300,000 purchase example above, the amount of additional liquidity required by the lender would look like this:
$13,500 6 Payments (Mortgage, Taxes, & Insurance)
+$50,000 Renovation Budget
=$63,500 Additional Liquidity Required
$149,750 Total Liquidity required ($86,250 + $63,500)
For a first-time house flipper, paying $300,000 to acquire and $50,000 to renovate the home, it will require nearly $150,000 in the bank to make it happen.
As a note, First Capital Trust Deeds does offer Fix and Flip + Rehab financing programs, where a first-time house flipper may be able to finance the renovation project, which will slightly decrease the liquidity requirement by $15-25K.
Example of a Fix & Flip Scenario for an Experienced Investor
Each month, FCTD originates a dozen or more hard money loans for experienced house flippers, several of whom buy and sell 10 homes per year. Hard money financing for experienced investors looks a little different than for the first-timer.
Using that same $300,000 purchase price, an experienced investor is looking at an LTV of 85-90%:
$300,000 Purchase Price
$255,000 Loan Amount (85% LTV)
-$5,100 Loan Origination Fee (2 Points)
-$4,500 Closing Costs
=$54,600 Total Cash-To-Close
Hard money lenders usually want to see up-to-date liquidity to make sure the investor has cash on on-hand. But, at this point in a successful lender-borrower relationship of many years, asset verification is mostly a formality to have in the loan file. Experienced real estate investors can expect to receive higher leverage financing at better pricing than first-time house flippers.