In today’s low yield environment, people get sticker shock when they hear about borrowing costs, especially when it comes to alternative financings being higher than 4%… What a joke.

JP is a friend of mine that runs a small fix and flip, REO real estate fund. He does it via a hedge fund whereby the investors receive 8% yields, but it’s structured as a loan to the entire portfolio. He tends to get top dollar on the resell of his homes, as he waits for end users to occupy the house and normally doesn’t sell to other investors. He’s what I call a “blood out of the rock” type of guy. But that tactic also costs him money at times. He recently had an opportunity to buy a pool of homes that was greater than the capital available in his mini fund. He called a local lender and said he wanted to get a loan against some of his homes or this new pool on acquisition so he could buy a few others that just came on the market. He was quoted a loan at 12% based on a 65% LTV. That would have enabled him to have time to get full ask on his homes and money to buy this pool that had popped up, fix it and flip it. He balked at the terms… “I CAN’T PAY THAT!!!” That pool was open for 2 weeks and he scrambled to find cheaper capital. He came back to the lender, but it was too late, it already had a contract on it.

The pool projected a rate of return of over 25% and he figured he’d be out of it within 6-9 months, so in actuality it’s a 37.5-50% annual ROI. Of course, I’m not suggesting people should take every deal that comes their way, but if you are working with reputable lenders, who has the ability to close fast, has available capital, and is able to make quick credit decisions by utilizing data and technology, sometimes a bird in hand is better than 2 in the bush.