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Transactional Funding 101

You've decided that fix and flip investing is for you. You have some knowledge of contracting, know how to work with contractors, can negotiate with the best of them, so you really are ready for your new business... almost. There's this nagging little problem of money.
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You've decided that fix and flip investing is for you. You have some knowledge of contracting, know how to work with contractors, can negotiate with the best of them, so you really are ready for your new business... almost. There's this nagging little problem of money.

Fix and flip investing is a short term gig, with some nice profits in it if you have your stuff together. But, first you need to buy a home, then you need to rehab it, and then you need to carry it until you flip it to your buyer. Usually we're talking weeks to a few months, but there is still the money involved and the costs to carry the deal from purchase to closing.

The great thing about this country and business is that where there is a need, a business will come in to fill it. Transactional lenders are out there just for this type of project. They make money making short term loans to fix and flip investors. No, they're not cheap, but it's a cost of doing business. And, if there weren't still nice profits left over for the investor, the transactional lenders wouldn't be flourishing.

A Google search will quickly prove that there are plenty of companies out there offering this service. As with anything in business, do your due diligence and investigate your choices to make sure you don't get burned. However, this is a valid business service that is helping many new and experienced real estate investors to get deals done.

So, how does transactional funding work?

Let's look at the typical fix and flip deal for our transactional funding tutorial. Here are the deal components that require money:

• Purchase of the property to be rehabbed and sold.
• Costs to rehab the property, all construction, repair, permits, etc.
• Any other holding costs required to get the deal to closing.

As a fix and flip investor, you need to fund all of these things, and perhaps for more than one deal going on at the same time. So, what does the lender look to in order to decide if to loan you money and how much? It's really not your credit score. However, a track record of successful fix and flip deals does help. If you are doing deal after deal with the same lender, the relationship should strengthen your ability to get money anytime you need it.

Basically, they need to cover their interests, so they are only going to want to loan around 60% +/- of the value of the property before the rehab. So, you really need to get a good deal on the home. They loan you the money you need to get the job done, and they are paid back plus their fees at the closing when you sell it.

So, what are their fees?

This is highly variable, and can vary based on your experience and track record with the lender. However, generally they will want interest for the time the money is loaned, an origination fee, and other fees and costs. It isn't cheap. Often you can pay several thousand dollars to get a deal funded for two or three months.

The key is to make it a valid cost of doing business because there is a lot of profit in the deal. It's not really something to complain about if you pay $3,000 in costs to fund a loan that nets you a $17,000 profit over three months. After all, the alternative was probably no deal at all.

Do your homework, but don't worry about the availability of money if you can find the right fix & flip opportunity.