Lending Your Money vs. Flipping Homes…..What Makes More Sense?

I have many friends who are investing in real estate in today's market, and are making a great deal of money doing so…but when I thought about it, I actually began to wonder who is actually making a better profit or should I see an easier profit?

Is it the guy who lends the money or the guy who buys and flips the home?

Not sure if you've ever given this too much thought, but this is what I found when I looked at a recent real estate transactions from both the buyer and lenders perspective.

Recently a client of mine came to me looking for a loan because he found a great property in south Florida and had visions of making a great deal of profit.

The property he was buying was listed at $120,000 and he was able to get the price down to $105,000.

Based on the comparable sales in the area, this property was a good deal, with an after-repair-value of approximately $225,000.

He came to me looking for a loan of 105,000 +plus $25,000 for repairs or a grand total of $144,643.00 which included all of his closing costs and fees associated with the loan. I was able to secure the financing he was looking for at a rate of 18% and 9 points giving him a monthly payment of approximately $2,169.65 per month.

Although he had to put up the initial funds for repair, he was able to draw down on the rehab funds held in escrow to complete his repairs.

It took him approximately 60 days to complete the entire project and once completed, he put the property up for sale at 15% less than the going market price of most homes in the area. He set his sale price to $225,000 and within 6 months from the time he purchased the property he agreed to sell it for $200,000.

Having the insight to the entire transaction, I was able to put together a picture of the deal from his perspective.

Here is how it looked for him on paper...

Purchase Price: $105,000
Repair Costs: $25,000
Carrying Costs {6 months}: $13,017.87
Insurance: $900.000
Taxes: $1,800.00
Loan Amount: $144,643.00
Closing Costs: 6% + 3% Broker or $11,943.00
Total Invested: $157,660.87
Realtor Fee: 6% or $12,000

Sale Price: $200,000 – $157,660.87 – 6% Realtor Fee or $12,000 = Total Profit of: $30,339.13 Earned over a 6-month period of time.

Once I determined the buyers profit, I wanted to determine how much the private equity investor made on the deal...

Here is how it looked for the private investor:

Amount Borrowed: $144,643.00Investor Fees: 6% or 8,678.58
Interest Earned @18% over 6-Months: $9,040.19
Total Return on Investment {ROI}: $17,718.77 or approximately 12% APR on his money for only a 6 month period of time.

Although the guy borrowing the funds made a higher return, he did a considerable amount of work and spent a lot of time in order to do so. Had the buyer of this home decided to not do all the work himself, he could have easily cut his entire profits in half.

After reviewing this entire deal and all the details from both angles I quickly determined that lending money was realistically the easiest and quickest way to make a profit. I found out that most "private money investors" were actually real estate investors prior to becoming private money investors...and in most cases, this was the reason they have the ability to become lenders themselves.

Needless to say the "private investor" in this example came back and reallocated the entire amount he made on this initial investment along with his profits for the next 6 months....

Here is how is how he made out on his 2nd transaction and the return he earned over 12-months.

Amount Borrowed: $162,361.00 - {Includes Profit + Interest Received on Last Transaction}

Rate/Mortgage Fees: 18% for 6 months/Plus 6 points.

ROI: $24,354.15

Amount In-Hand {after 12-months}: $186,714.15

Initial Investment {beginning of year}: $144,643.00

Net Profit: 186,714.15 - 144,643.00 = 42,071.15

12-Month ROI: 29%

After completing this transaction, I calculated the profit from both deals and determined his 12-month ROI to be approximately 29% APR.....which is not too bad considering he never had to get his hands dirty.

The best part about both transactions is that his money was never really at risk, as he borrowed less than 55% Loan to Value meaning he had 45% worth of equity in the property in the event the buyer defaulted on his loan.

After closely analyzing the approach of these two investors in today's real estate market from both sides, I've concluded that lending the money is more profitable and safer in the long run and definately requires less stress and strain on the mind and body.

Many of you may look at this deal differently, but It is always good to see the deal through the eyes of two different types of real estate investors.

For more information on how you can become a private money real estate investor for residential and commercial properties, please contact Mark Battles at 407-575-4005.