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August 20th, 2017, 08:48 PM   #1
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How to quantify aggreggate capacity to borrow/invest?

Here's my situation..

I have the ability to borrow from 3 different sources.

-I have an investor who loans me money at a varying interest rate and he will loan me up to 150,000 USD.
-I have 150,000 worth of home equity.
I also have a Hard Money Lender that will loan me 85% of any project at 12.99%, requiring a 15% down payment.

There are lenders fees and additional points associated with the Hard Money Lender (HML), but I will just keep it simple for the sake of this post.

My strategy would be to, for example, take 37,500 from either the investor or the home equity and use it as the 15% down payment on a Hard Money Loan.

I could borrow a theoretically infinite amount from the Hard Money Lender, but by using this HML, I can multiply the amount I can borrow at once to well above 300,000 even though I'm paying a higher rate for the 12.99% portion, it is still worth it.

So if I borrowed 37,500 from either the investor or the home equity, that would be the down payment on a 250,000 project. I could afford to do this 8 times.

What formula could I make so that I could mathematically see what are good business decisions? Even though it's common sense I should just flip as many houses as possible and borrow at the lowest rate possible, but I would like to see a formula so that I could change the variables and see this in a quantified sense.

Can anyone help me with this?

Last edited by farmerjohn1324; August 20th, 2017 at 08:51 PM.
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August 20th, 2017, 09:13 PM   #2
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seems like that "Varying interest rate" from the investor may make it complicated. Also this does not say anything about the future cash inflows of the project and length of project.

Too many missing variables. Otherwise you could come up with an Net Present Value function and try to optimize it
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August 20th, 2017, 09:53 PM   #3
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Quote:
Originally Posted by dthiaw View Post
seems like that "Varying interest rate" from the investor may make it complicated. Also this does not say anything about the future cash inflows of the project and length of project.

Too many missing variables. Otherwise you could come up with an Net Present Value function and try to optimize it
Let's say the investor is 12%, the HELOC is 5%, each project takes 4 months, and there are no future cash inflows because those are included in the original loans.
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August 21st, 2017, 07:11 PM   #4
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Was anybody able to figure this out?
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August 21st, 2017, 07:45 PM   #5
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Was anybody able to figure this out?
I pretty much stopped reading when I got to borrowing an infinite amount. That's just fantasy land. But if you have 300K in borrowing capacity, and can use that as an investment where an investor will put up 85% of the money for projects provided that you put in 15%, then you can invest in projects amounting to

$0.15p = 300K \implies p = 2,000K$ or 2 million.

Now if you have to make interest payments on the 300K before paying off the loan or pay points or fees up front, that will reduce that amount, but, as you say, that gets complicated.

There is no objective way to compute what you ought to do. You could make a subjective expected value calculation by assigning potential values and associated probabilities under various contingencies. Being an entrepreneur is not math.
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