When looking to fund your fix and flip, it’s important to understand where the money comes from.
In general, the money in your bucket comes from two places: lenders and your own pocket. It’s important to know how these funds work together to fund your project.
What Does “Lender Funding” Actually Mean?
When lenders talk about funding 90% of purchase or 100% of a renovation, it sounds like they’re paying for more than they actually are.
True, they’re taking care of a huge portion of the cost (that you will pay back eventually). However, you’re still going to encounter additional costs and fees that you’ll have to pay out of pocket to complete your fix and flip.
If you’re not prepared, it stalls your project, and you might end up paying even more than you otherwise would have.
Reimbursable Fix and Flip Costs
This is a sub-category of money you’ll need for your fix and flip. You should also have extra funds in your money bucket to pay for certain projects up front. Even for costs that will be reimbursed!
Because most lenders only reimburse you for completed work, you’ll need out of pocket money to fund the first one or two draws to keep the project going.
These can be expensive and could cost around $15,000 each. You can find more information about how to pay for these first draws in this article from Hard Money Mike.
These draws will be reimbursed eventually, but you need the funds available up front to get your fix and flip moving. This isn’t technically an out of pocket expense, but it can feel like it while you’re waiting for those first renovations to be completed.
How to Fund Out of Pocket Costs
It can be overwhelming to look at the out of pocket costs adding up for your fix and flip. You can easily expect to pay an additional $20,000 in expenses alone, and that number can rise to $50,000 if you include the funding you’ll need for draws.
It’s best to have these funds available in a savings account, but you can also use gap financing.
It’s also important to build your credit and be smart about how you’re using credit cards. Some business credit cards let you draw beyond the cash limits. This can be helpful in covering some out of pocket expenses.
You can also look into hard money loans. Depending on your project, different loan options could better fit your needs. Shop around on the front end to avoid delays in your fix and flip projects. You can also use our loan cost optimizer to help you find the right deal for you.
Read the full article here.