let’s talk : PREPPING YOUR BANK ACCOUNT FOR REAL ESTATE VENTURES
Good morning!
We are gearing up to start a second flip (fingers crossed), and I am working to ensure we have enough cash in the bank. There are so many ways flips, funding, the whole thing can go wrong. Let’s talk about what I am doing to prepare, and hopefully after reading this, you can share some tips with me about what YOU DO.
So, as we do, let’s talk Real Estate, let’s talk PREPARING YOUR BANK ACCOUNTS FOR REAL ESTATE VENTURES…
Now, we are kind of hitting a perfect storm on our end. We recently purchased a triplex that has A LOT MORE “urgent” work than we had anticipated AND we decided to tackle a new flip all at the same time. This is kind of dumb, I know, but we are determined to get creative and make it work.
SO HOW DO WE ALLOCATE OUR REAL ESTATE FINANCES?
Well, we have 2 bank accounts. One is for the rental properties, and the other is for the flips. We keep them separate and that is super helpful.
On the rental side, I can “safely” (knock on wood) forecast our income for the next few months on all the leases. Once I subtract out all of our recurring expenses (insurance, taxes, etc.) then I know just how much we are making, and how much we can spend on updates to the home. I do not think we plan to allocate any new money into this account for a while so I have to try and plan accordingly. Since we know exactly how much cash we have to make it work, we will space out the repairs, putting anything of a safety issue to the top of the list.
ON THE FLIP SIDE
We are going to use hard money for this project (DUN, DUN ,DUNNNNN). Now before you gasp, and say “that’s dumb”, just know, that even WITH the high costs associated with this financing, we still anticipate (again, knock on some serious wood) a profit. For our specific loan, we will be financing 90% of the total purchase price + renovation budget.
SO, HOW DO THESE LOANS REALLY WORK?
Below is a rough idea of what we are looking like for our operating rhythm…
Day of Closing: We will bring 10% of the purchase price to the table + $$ for title insurance + $$ for a 12 month builder’s risk insurance policy (which we must pay in full).
Then, once the house is officially ours, we can begin!
Day 1 of Renovation: We pay our contractor a 20% deposit at the start of the contract. This will cover the demolition of the property, the framing of the original structure, and a new roof to prepare for the 3rd story addition.
Draw 1: Once the demolition is complete and framing of the original structure is complete, we can take what is called a draw, from our lender. The lender will send out an inspector to ensure the work has been done and, if satisfied, they will reimburse us for the cost of this phase. So let’s use some random numbers as an example, let’s say we pay $10,000 for demo and $12,500 for the framing of the original structure out of our own “personal” business bank account. Once the work is complete, the lender will confirm they are satisfied with the work and then will wire us back $22,300 (because we have to pay a $200 fee for each draw).
Essentially, we pay for each phase ahead of time, and once the work is complete, our lender will come out and reimburse us.
For this project we have 7 different draws set up, so this will continue to happen off and on as each phase of the project is completed.
WHAT OTHER COSTS CAN I ANTICIPATE WHEN USING HARD MONEY?
Well, for our specific lender, we are paying the following;
Upfront origination fee
Monthly interest only payments
Draw fees ($200 per draw)
There is no prepayment penalty here! So we have included an incentive for our contractor to finish this project on time and on budget so that we can close this bad boy out as quickly as possible.
Now, please tell us, how do YOU “prepare’ your bank accounts to take on these real estate ventures? Do you have a line of credit you pull from? Do you just use your equity injections? What works best for you?! We are still learning here so we would love to hear what you all find to be the most helpful!
Feel free to comment on the blog post HERE and let us know what YOU think!
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Happy Wednesday!
Erin
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