Funding a Deal: The Options in the Foundation Lesson

TLDR
The lesson compares several ways to fund a property and shows how the cash required changes with each structure. Its dollar amounts are teaching examples, so confirm current terms, eligibility, occupancy rules, fees, and required cash with the actual lender before you rely on them.

Table of Contents

Start With the Structure

The funding question can stop a new investor before a deal is even studied. I answer it by comparing structures. One loan does not fit every property.

The central question is simple: what does the lender finance, and what must you bring? A loan based only on the purchase price creates one cash requirement. A loan that also recognizes renovation cost or after-repair value creates another.

A Home You Will Occupy

For a primary residence, the source uses a $200,000 purchase and two low-down-payment examples: 5% for a conventional loan or 3.5% for an FHA-insured loan. That puts the example down payment at $10,000 or $7,000 before other closing costs.

HUD currently says an FHA down payment can be as low as 3.5% in many cases. Conventional loans also have principal-residence, second-home, and investment-property categories; the exact down payment and eligibility are not universal.

The lesson assumes that the buyer will live in the house while improving it. Do not turn that example into a blanket one-year resale rule. Occupancy, renovation, and resale conditions depend on the loan program, lender, and signed documents. Verify them before buying.

The Bank Examples

The source next compares two investment-loan examples for the same project: a $200,000 purchase and a $30,000 renovation.

In the first example, the bank finances 80% of the purchase price. The buyer brings a $40,000 down payment and the $30,000 renovation budget, for about $70,000 before other costs.

In the commercial-bank example, the bank finances 80% of the combined $230,000 acquisition and renovation amount. That leaves $46,000 for the buyer.

Those figures explain the structure. They are not quotes from every bank. Rates and loan-to-value limits vary. So do reserves, collateral, experience rules, and repair draws.

Hard Money and ARV

The lesson explains hard money as financing tied to the finished property’s value. It gives a range of 60% to 75% of ARV and then uses 70% for the examples.

With a $300,000 ARV, 70% is $210,000. The example project needs $230,000 for the purchase and renovation, so the remaining gap is $20,000.

With a $350,000 ARV, 70% is $245,000. That is $15,000 more than the $230,000 purchase-and-renovation total in the example. The lesson uses this to show why a better deal can reduce the investor’s cash requirement.

That does not mean every lender will advance more than the purchase and repair total. It also does not promise cash at closing. A real term sheet may cap proceeds or require a down payment. It may repay repair costs through draws, charge points and interest, or require reserves. Use the example to learn the math. Then underwrite the real terms.

Private Debt and Partnerships

The source describes two private-capital structures.

With private debt, a person lends money at an agreed return. The lesson uses 10% to 12% as an example, similar to the role of a hard money lender.

With a partnership, one party may provide the deal and execution while another provides capital. The source uses a 50/50 profit split as an example.

I prefer hard money because the lender is already in the lending business. I warn against raising equity from friends or family while you are still learning. It can put their money behind your beginner mistakes. Any private loan or partnership needs written terms. It also needs sound legal and tax advice.

Cash and Capacity

I also explain why I did not stay all-cash after losing about $200,000 on a project. When all available cash sits in one job, a delay can stop the next one from starting.

Borrowing can preserve operating cash and allow more than one project to move. It also creates interest, fees, deadlines, and default risk. My point is about capacity, not a command to maximize debt.

Keep the distinction clear:

  • Cash can reduce financing cost and lender risk.
  • Debt can increase capacity and preserve working capital.
  • The property, loan terms, reserves, and ability to absorb a delay decide whether the structure is sound.

Funding is not separate from the deal. It is one of the deal’s costs and risks, and it belongs in the underwriting before an offer becomes a commitment.