Many investors focus too much on loan approval amounts but overlook one of the most important indicators of project success – working capital.
Working capital is the cash an investor keeps available to cover day-to-day project expenses and unexpected costs.
In terms of property flipping, working capital helps keep projects moving when delays, cost overruns or other opportunities arise.
It is not the same as profit – profit is the margin after a property is sold and all expenses paid.
Nor is it the same as equity – equity is value inside a property.
Working capital is the amount of available cash on hand and experienced flippers treat it as a critical business asset.
Working capital: A simple explanation
Imagine a flipper buys a $300,000 property and has $100,000 equity in it.
But they have no available cash.
It means they are asset rich but cash poor – they have no working capital.
Flippers and developers need working capital for multiple reasons to cover:
- contractor payments
- labor costs
- material costs
- utility costs
- permits
- insurance
- property taxes
- interest payments
- unexpected repairs
When property flippers run out of working capital
Running out of working capital is disastrous for flippers and ultimately adds significant delays and expenses to projects, putting their profitability in jeopardy.
Many failed flips are the direct result of cash-flow problems more so than any other specific reason.
That’s why without working capital on hand, projects are prone to a domino effect of disasters:
- contractor disputes arise from unpaid accounts
- this can trigger construction delays from unpaid contractors
- this forces emergency borrowing often with unfavorable financing
- it can blow out the cost of the entire project, ultimately reducing margins
- in worst-case scenarios, flippers may be forced to sell prematurely
- future opportunities can be missed with capital tied up in delayed projects
How much working capital is enough?
There is never a magic number equal to the amount of working capital needed for any given project.
Experienced flippers leave themselves enough to complete projects and absorb any unforeseen circumstances without being forced into a distressed sale.
The amount needed varies from project to project and is dependent upon its size, market conditions and the flipper’s experience level and risk tolerance.
As a general rule of thumb, flippers should have enough working capital to cover:
Purchase and renovation – their cash contribution after the loan
Holding costs – interest, taxes, insurance, utilities, HOA dues
Contingency reserves – always include a buffer of at least 10-15 per cent for emergencies
Operating reserves for future deals – if running multiple projects concurrently
At a minimum, most lenders require working capital of 10-20 per cent of the total project cost with 3-6 months of carrying costs in reserve.
Experienced flippers give themselves even more wiggle room by stretching that to 15-25 per cent of the total project cost and 6-12 months’ holding costs, especially in slower markets.
Why lenders care about working capital
Strong working capital suggests a borrower is better equipped to navigate challenges and complete projects successfully.
Private lenders usually evaluate a borrower’s:
Liquidity – how quickly they can liquidate assets if needed
Cash position – the amount of cash they have in their bank account
Reserves – the contingency kitty or amount of cash they have deliberately set aside to survive problems
Without enough working capital a borrower would need to draw on more of their own assets, borrow more money or sell the property prematurely.
Get finance and support today
Working capital is not an overly sexy concept in the often glamorous world of property markets.
But it is often the difference between a project that stalls and one that succeeds.
Successful property entrepreneurs don’t focus solely on assets – they focus on liquidity.
They understand that assets create wealth but liquidity preserves it and creates opportunity.
While others are forced to sell, liquid investors have the power to negotiate, buy more properties and grow their portfolios.
And they can contemplate multiple exit strategies depending on market conditions and their personal investment goals.
But without liquidity, an investor’s options are limited.
There is no better partner and mentor than Equidy if you are interested in discussing your liquidity, working capital or anything related to property flipping, investing or development.
Equidy has an intimate and personal history with all aspects of property development in California and has done so for well over 40 years.
Their sole focus is to help you maximize the return on your investment without putting yourself at unnecessary financial risk.
And here’s the best part.
Equidy is a hard money lender that can finance flippers and developers in as little as 48 hours.
They stand by their core belief that anything is possible and they strive to prove it every single day.
Even in tough economic times, they are determined to reward entrepreneurship and resolve to help their clients crystallize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
