• Jared Jones

Investors - Should you use cash or borrow when flipping real estate? | Jared Jones

The next point, leverage or not to leverage. So the next piece of this that I notice when I'm dealing with investors is their coach, your one direction or another as it relates to borrowing money. Now, my thoughts on this are if you can absolutely see an incremental increase in your margins by borrowing money, then go ahead and do it. Borrowing money, using leverage is a risk. OK. You don't have to do it in all circumstances. And here's what I mean. The most common case where people get driven to borrow money is if they're buying in a very, very low price range. So in Florida, for instance, you're buying with one hundred thousand dollars and you have a half thousand cash. You could easily buy a very nice flip in the Tu's borrow money. You'd have enough for the down payment. You'd have enough for the rehab with one hundred thousand cash. Now, at the same time, you could also shot the market and you find a house that needs work for around 120 that you negotiate into the price point. You know, you have 100 grand cash. And you can negotiate that property down. So which one should you do? Well, the reality is that I know for a fact the margins will be a little bit bigger if I had a little bit more to spend.

I could get the two hundreds of my purchase price. The margins will jump. But I can also take an investor who has all cash at a hundred thousand and they could make 14 a half percent net, for instance, one time in the trains. Again, this isn't a guarantee, but this is a kind of like what I see in the market, 14 a half percent net do it three times in that year. And that's a pretty good return with just the cash. It is slimmer, though. What does happen in the lower price ranges is the margins can get squeezed because there's a lot of competition, a lot people can afford to invest in that price range. That's why if you jump up a level, then you can actually get bigger margins. If you can buy a home, for instance, for twice the amount for sample to 10 to two, 30 to 40 range. And you have a much higher gross profit. You might have to borrow. So let's say that borrowing costs you ten thousand dollars between your closing cost and your monthly interest payments before the house would resell it and be flipped back to the market. Is the incremental profits in the market you're in worthy of the leverage? Because leverage brings risk.

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