Hard money lending, residential RE flipping

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She has to put $5000 down on the first property and she’ll get 100% financed in subsequent transactions.

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IMO, this statement is the real sticking point. If you are getting hard money, you are paying points on that up front. Plus you've got closing costs and holding costs for the time that it takes to perform the work. I don't see how $5000 is going to get you there, although it depends on a lot of factors.

The bigger problem is the second statement. Getting 100% financing on a flip deal is unheard of. You're not going to get hard money without paying the points and probably the closing costs. And the lender is going to want you to have some money in reserve for holding the property and contingencies. This will cost several thousand depending on the deal. So if the money isn't coming out of the pocket of the investor, then where is it coming from? Where is the contractor going to find this magic deal where you're making something for nothing?

IMO, since your friend is not experienced in real estate investing, I think that she should pass on this deal. The problem is that she really just doesn't know the danger areas to watch out for, and she may end up getting seriously burned. Also, I think that if this contractor is experienced and does quality work, then he should have a decent base of other experienced investors that he can call upon to partner with on deals like this. The fact that he is offering the 'amazing' deal to an inexperience investor who doesn't understand the deal is a little telling. Its like he doesn't want his investors to really understand the deal very well.

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also the real estate market is going to tank, in my opnion. not a good time to be stuck with a property you need to flip.

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also the real estate market is going to tank, in my opnion. not a good time to be stuck with a property you need to flip.

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Don't listen to this advice. Real estate markets are localized. You just need to pay attention to your local market. If you are lucky and there is a lot of economic growth in your area, then your market will heat up regardless of what all the 'experts' on CNBC and NPR say.

What is happening in a lot of places now is a backlash from banks lending at real low interest rates. But even if you are in a cooling market you can still find good deals. In fact, a cooling market is when you want to buy - low prices, a lot of distressed owners, a lot of foreclosures, etc. These make a buyer's market, which is good for investors. It makes flipping tougher b/c you've got to hold the properties longer. But you can still invest - eventually the property will sell (although probably at a bit lower of a price than you'd have liked).

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you don't want to chase a falling knife. i have money set aside for rental properties, but that is a different scenario than flipping. buying properties now is not a bad idea if you get a fixed rate mortgage. even if the market tanks it is still a weighing game between price and mortgage rates to see if it is a good idea. but this is a long term stategy.

though you are right that the local market is important, it is true that in general, in most areas, now is not the time to be stuck with a property you want to flip. it is not a sellers market and if you can't afford to be stuck with a property you don't want to put yourself in that situation.

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you don't want to chase a falling knife. i have money set aside for rental properties, but that is a different scenario than flipping. buying properties now is not a bad idea if you get a fixed rate mortgage. even if the market tanks it is still a weighing game between price and mortgage rates to see if it is a good idea. but this is a long term stategy.

though you are right that the local market is important, it is true that in general, in most areas, now is not the time to be stuck with a property you want to flip. it is not a sellers market and if you can't afford to be stuck with a property you don't want to put yourself in that situation.

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Right, I basically agree. But IMO, fundamentally a good deal is a good deal. A down market just adds another cost to your flip deal, namely, that you'll have higher carrying costs. But the house will sell eventually unless there is a very significant economic downswing in the local market - like a major employer closes up shop or something. I think that it goes too far to say that a flip in a down market is a bad investment. But for the OP's friend, I'd go back to my original comment that she is probably not experienced enough to assess the deal effectively.

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yes i agree with you, especially your original post. and she should remember that contractors can be very shady.