When taking on a real estate deal that you are flipping, which is the best way to go…pay cash, get a partner, or use hard money? Let me discuss the pros and cons of each and let you decide.

Cash: For those that have cash this can be a great way to go. It obviously limits your risk substantially due to the lack of ongoing interest payments that eat away at your profit. It also gives you options if you are not able to sell it for the price that you want and in the time that you want. One of those options would be to possibly rent it for awhile until the market changes.

The cons of paying cash, is that regardless of who you are and how much cash you have, there is still a finite amount of it. If you have all of your cash out in RE deals and you have a short term emergency, or amazing opportunity, you will be in trouble or not able to capitalize due to your lack of liquidity. There is also an “opportunity cost” associated with your cash. For example having your cash tied up in a non-liquid flip for 6 months has an opportunity cost associated with it which means that those funds are not available for use elsewhere.

Partner: Partner deals are structured many ways. For example if you were my partner and you had cash, I would approach you about a joint venture. I do all of the work from finding the deal, purchasing, rehab, managing the project, marketing and selling and all you have to do is put up the cash. In exchange for your cash I will give you a nominal preferred return on your capital and then after that is paid we split the profit 50/50.

The pros of this scenario are similar to cash. Your risk is way low due to their not being any ongoing interest payments. Your cash flow as an investor is in good shape because you are not having to shell out mountains of money for repairs, interest, insurance and utility expenses.

The glaringly apparent con is that you are going to give up 50% of the profit.

Hard Money: This is a loan that you get from an asset based lender. Hard money lenders do not care about your credit, or anything else that a traditional lender cares about. They are concerned about the equity in the deal. This is why it is an asset based loan, not a borrower based loan. The amount that they are willing to lend is based solely on the equity in the property.

The pros for hard money is that you can get into a deal with only having to have a small down payment and repair money (some hard money lenders will lend you the repair funds too). You will have to make monthly payments but again this is much less capital than if you were to pay cash. A hard money lender allows you to control the whole deal so you keep 100% of the profit. Think of them as a cheap partner.

The cons are that the interest rate is high – usually 12% – 18%. You also have to pay loan fees – anywhere from $500 – 3% of the loan amount. Provided that you are in and out of your flip in less than 6 months the interest rate shouldn’t’ bother you. However, if you run into repair snags, or your property languishes on the market, not only does your profit decrease everyday due to interest expense but the cash out of your pocket continues to rise with each months payment. This becomes a dangerous place for an inexperienced investor who does not know whether to reduce the price and take a loss or keep feeding the beast in the form of interest payments.

So, which way is best for you? It really depends on your investment objectives and your risk tolerance. There is a reason to use each of them, as I have. I would love to hear your comments and feedback as it relates to what way works best for you. Leave a comment below. And don’t forget to like us on Facebook.