If you’re new to the real estate game, learning how to use escrow is a critical step towards success.
Everyone in the fix and flip game is likely going to encounter escrows.
A popular strategy is to use private (or hard money) loans. These can be helpful because they can fund up to 100% of your rehab and are super flexible.
The tricky thing (and where escrows come up) is that a lot of lenders require that you start the project with your own money, reimbursing you later through escrow.
This can become a problem for beginning real estate investors if they’re not prepared to pay that much on the front end.
Where do you get the money? How and when do you actually access the escrow funds?
How Does Escrow Work?
Think of escrow as a reimbursement program. Lenders lock a certain amount in the escrow fund and you submit draw requests throughout your project.
You’ll likely need an additional $50,000 (from your own pocket) to get the project going to submit the first draw (essentially, reimbursement) request. In order to keep things moving, you should also try to have pocket cash for the second draw as well.
It looks a bit like this:
- Put your own money in to start project
- At the end of the week, submit your 1st escrow draw to your lender
The lender might take some time to go through their verification process, so you should prepare for a week two along these lines:
- Lender begins reviewing 1st draw request
- You keep moving forward with your project, paying with your own money bucket
- At the end of the week, you submit your 2nd draw request
- Lender reimburses 1st draw and begins reviewing 2nd
Hopefully after the first two draws, you won’t need any more out-of-pocket cash.
Also, remember that those initial draws are covered, you just need the money up front, and then they reimburse you out of escrow.
How to Get Initial Funds to Access Escrow
You need a full money bucket – a supply of personal funds you can use for those out-of-pocket expenses.
How can you make sure you’re money-prepared before you get into this?
1. Business Credit Cards
If you can, get business credit cards. Business cards are a great way to protect your personal credit score. Also, if you’re smart about choosing a 0% card, you could go through the whole process without paying any additional interest.
If you have questions about setting up your business credit cards, check out The Cash Flow Company, our sister company that specializes in money-preparedness.
2. Lines of Credit
We recommend business lines of credit or, at the very lest, HELOCs on your home. The most important thing is to keep your projects going, and having a variety of lines of credit is going to help.
To learn more about bank lines or HELOCs, check out this article from The Cash Flow Company.
3. Other People’s Money (OPM)
You can look to family, friends, neighbors, acquaintances, anybody out there who’s looking to put some money to work.
Even smaller amounts like $25,000 will make a significant difference, and you can offer a better rate than larger banks.
OPM is a crucial piece of filling your money bucket for those initial draws, and it’s also a relatively safe investment for people around you.
4. Gap Funding
Gap funding refers to any loan you get to fill a gap in your project.
Lenders still look for security in the loan, but if you’re able to show security, gap funding is another possibility for paying for those first escrow draws.
Hard money loans can often be used as gap funding, and you’re welcome to reach out to use if you want to discuss a deal with us at Hard Money Mike.
You’re Ready to Use Escrow Funding!
Having a full money bucket at the front end makes a huge difference in your success as an investor. Markets move fast, and stalled projects can end up costing more than they’re worth.
These strategies can fill your money bucket and help you access escrow quickly and successfully.
If you have any questions, feel free to reach out to us at Info@HardMoneyMike.com. You can also contact our sister company at Info@TheCashFlowCompany.com to discuss business credit cards or other aspects of being money-ready.
Also, check out the free tools, calculators, and information on our website. Our only goal is to help you be successful on your investment journey.