It’s the age-old question.
Is it better to fund that fix and flip deal with cold hard cash or use leverage to make the purchase?
Well, here at Navigator Private Capital we are obviously a bit biased but it’s pretty clear to us that leveraging the property is the way to go. Why, you may ask?
Let’s break it down…
Ponying Up The Cash
Suppose you find a distressed property with tons of fix and flip potential and a list price of $100K. And let’s also assume that you have $140K in the bank - liquid and ripe for investment. So one option is to purchase the property outright and use the $40K for repairs. Let’s also assume that you can turn around and sell the property for $200K. That’s a $60K profit of about 40% return on your original investment of $140K. Not too shabby.
Forgoing Opportunity
But, think about this. By pouring all of your cash into one single property, you are effectively shutting the door on all other opportunities that may come knocking. That means missing out on potentially profitable deals that may require a bit of cash up front. Somehow this doesn’t seem to be the best use of limited resources, does it?
Leveraging Your Profits
What if, instead, you procure some financing and leverage your investment? In the prior example, remember that you have $140K in the bank waiting to be deployed. Consulting a good private lender that specializes in fix and flip financing, you figure out that, for only about $20K upfront, you could make 7 investments similar to the scenario described above. That’s because asset based lenders like NavCap will fund 100% of the property’s purchase price plus estimated repairs, freeing up your investment capital. Without getting too bogged down in the details, that means your overall profit would rise as well. If you were to invest in 7 properties instead of one and realize a $60K profit on each, that’s a cool $420K or a 300% return. Big difference, right?
Mitigating Risk
Now, we know what you’re thinking. The risk of leverage is too high, and I could lose everything! But, in each deal, how much is really at risk? Just the $20K, right? You have a higher initial outlay with a cash deal, and a lot more on the line. Plus, spreading your dollars across multiple deals brings diversification into play, tamping down risk even more. Because, honestly, what are the chances that all 7 deals are going to go south? If you have leverage, even if one deal goes awry, there are 6 others still on track and generating profits.
Have we convinced you? Are you curious to find out more about how financing your next project with NavCap can lead to greater returns? By offering our clients flexible terms and competitive rates, we can custom design a deal to fit your individual needs. Reach out to us at 443.603.0193 or info@gonavcap.com for details.