What are escrow funds and how can you use them to get ahead of the game?
If you’re looking to finance property fixes, understanding how to leverage escrow funds effectively can make a huge difference in the success of your real estate investment endeavors.
What Are Escrow Funds?
Escrow funds are the funds set aside by lenders specifically for the repair or renovation of a property.
Lenders can give up to 100% of the total repair cost. This escrow fund slowly repays you as you work on renovations. The only catch is that you need to put down the first 10-20% on the purchase price and begin the project before receiving reimbursement.
Securing and Using Your Funds
The best part about escrow funds is that they can fund up to 100% of the project. But how and when do you access those funds?
Each time you finish a portion of the work, you must submit a draw request. This involves providing documentation (such as photographs or on-site inspections) of the completed work. You’ll also need to submit invoices and proof of payment for the contractors involved.
Once the lender has evaluated the progress, they release the escrow funds to you.
Potential Challenges with Escrow Funds
One common issue is that many investors lack the necessary upfront funds to kickstart the project and cover initial expenses.
Starting a project often requires ordering materials, making down payments to suppliers, and coordinating various tasks, all of which can deplete your available funds. However, escrow funds aren’t reimbursed until the work is completed, creating a potential cash flow problem.
To fix this, it’s best if you have at least 20 to 30% of the funds for the repairs in your own pocket or, as we call it, in your own money bucket.
This buffer allows you to begin the project without only relying on escrow funds. That way, by the time you’ve finished the first project and can do the first draw, you can freely move onto the second draw.
Keeping your project moving forward is critical in a quickly moving market.
How to Put Money in Your Bucket
Escrow funds are great, but they don’t give you the money upfront. In order to begin a project, where can you get the initial finances to fund the initial payments?
- Credit Cards: Business credit cards are excellent to get projects started. 0% credit cards are even better to buy the materials that you need to pre-order.
- Paying Contractors Directly: If you don’t know how to do that, just email us and we’ll let you know how. It’s even better if you can pay vendors with your business credit cards.
- Get lines of credit and E-locks on properties.
- Loans from Family and Friends: You can often find family or friends who are willing to invest in your project. They’re going to get a good return on their investment, and your project gets the initial funding it needs.
- Loans from Private Lenders: Companies like Hard Money Mike are sometimes willing to provide up to 100% in escrow funds. Look for private lenders who provide flexible financing solutions that help keep your projects from stalling.
How We Can Help
By collaborating with lenders like us who understand the unique needs of real estate investors, you can ensure a smoother experience and avoid unnecessary delays that may result in higher costs.
If you have questions about escrow funds, contact us and we’ll be happy to help you out!
You can check out this video on our YouTube channel.