As Real Estate investors we’ve all experienced times when cash flow gets dangerously low as a result of holding onto unsold inventory. Cash flow is the lifeblood of any small business – so any delay or reduction in net free cash quickly creates an extremely stressful situation.
One way to increase cash flow is to increase revenue – but unfortunately that’s not always easy. The other way to increase cash flow is to lower expenses. There’s lots of advice available about how to lower rehab costs, how to manage subcontractors more closely, how to trim fat out of a budget, and so on. But your financing costs (“carrying costs”) are probably the single largest line item in your project P&L – so it follows that there should be some significant savings available in that line.
Mention financing costs to most real estate investors and they’ll immediately think of interest rates. While rates are indeed a key driver of carrying costs it’s very difficult for most investors to significantly change the interest rates that are quoted to them. Your personal credit profile, the project’s loan-to-value, total renovation costs - even the number of properties you have previously renovated – all factor into the interest rate that a lender offers. And most of those items can’t be altered or improved in the course of a particular rehab.
But if lower monthly finance payments are a good way to lower overall carrying costs then having no monthly payments would be a great way to lower your carrying costs - and keep more of your cash available for a new investment opportunity or just for any unforeseen project expenses that may arise. A few lenders offer this improved type of rehabilitation financing -which allows borrowers to include up to 6 months of interest payments in the loan amount. That means you’re not worrying about having to make monthly payments and you can focus 100% of your time and energy on completing the rehab of your property. Ask your lender about this option; if they don’t offer it, find another lender! It’s not yet a common feature in rehabilitation loans, but it’s well worth your time to connect with a lender that offers this powerful financing tool.
And we all know that the faster you can complete a project, the faster you can get it back on the market, and the less you have to spend each month you carry it, the greater your final profit will be.
Larry Brand is a Senior Vice President with Sprout Mortgage, heading the Rehabilitation Lending division. He developed Sprout’s Interest Reserve Program which lets borrowers come to the closing table with just a 10% down payment, title fee payment and an attorney. Best of all, 6 months of interest payments can be included in the loan principal - freeing up time and valuable cash to help get projects completed faster and more profitably. Contact Larry at (516) 393-0246 or firstname.lastname@example.org