Page 24 - From Ghetto to Gucci: The Basic Principles of Flipping Houses

But wait. What if you found two houses just like that? Here’s what loans allow you to do. With a
loan, you can buy these two identical houses for $20,000 down. You’re in a total of $40,000
now, and you’ve got $100,000 in collective repairs to do, so at the end of the day, you’re
$140,000 into the deal. Now, you’ve had to make mortgage payments during these three
months, about $1000 each month, so you’re at $143,000 invested. Now, you go to sell the
houses.

Before you cleared $30,000 profit for one house, with $150,000 invested. Now, because of
origination fees and early payment penalties, you’ll probably have to pay about $4,000 as the
cost of your loan. But you’ve just sold the houses, and the total return is in: you’ve made
$56,000 on an initial investment of $143,000 in three months. You just transformed your return
from 20% to 39%, without bringing in any additional money of your own. That’s the power of
leverage.

39% isn’t bad is it? Well, how would you feel if I told you that you could make the return go even
higher? Let’s go back to the example that I gave above. You’ve got that $100,000 house that
you’ll put $50,000 into to clear $30,000 in profit. You went from using money only to using a
mortgage. That allowed you to process two houses simultaneously. What if I told you that there
was a way to process SIX houses simultaneously for your exact same investment?

Six you say? How in the world can you process six houses using the same amount of money
that could process only one before? The answer’s pretty simple: more leverage. In this case,
you would apply for a conventional mortgage, and you would also apply for a construction loan.

Construction loans are loans that have a floating rate slightly above the prime mortgage rate
that’s set by the market. These loans sometimes require no down payment, and are
interest-only loans with payment due upon completion of work.
If you’re able to get both a conventional mortgage as well as a construction loan from your bank,
your investment in each house would look like this for a three-month flip at 5% interest:
$625 for construction loan interest payments
$20,000 for the down payment
$1,500 for interest on the mortgage

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