Common Questions Series: #1 How Do You Fund Your Deals??
Welcome to our Common Questions Series! Every day this week we will be tackling the most common questions that we get from people interested in getting started in real estate. Follow along to get the scoop!
One of the big questions we hear over and over again is how do we pay for our properties? The answer is… we are secretly loaded and inherited millions of dollars so money isn’t an issue. If you can figure out how to do the same, you’ll be set. Good Luck!
Ok I’m totally kidding. We are actually far from “loaded” and have utilized a variety of strategies to acquire different properties. Fortunately there are a variety of resources for financing deals, and depending on your exit strategy some options may be better than others for what you are looking to do. We’ll talk about different strategies you can implement for either flips or rentals whether you have money in the bank or not!
Let’s start with the Flips!
Private Money Lenders
This is one of our favorite ways to finance deals as it allows for very speedy transactions without all the red tape. A private lender is an individual who is able to finance the purchase and rehab costs of the property. We have found that there are many people who want real estate returns with their money, but have little time or expertise in real estate to carry out their own projects. Instead, they finance the deals for people like us who are able to put in the work, while in return the investor gets a higher interest rate than they are typically able to get elsewhere.
You can expect to pay your private lenders between 9-12% APR on their money. You might be thinking, “Dang that’s a high interest rate to pay someone,” And you’d be right, but from the way we see it, private lenders enable us to purchase these properties so we are happy to give them a higher interest rate. We calculate the interest into our costs for the project so we know the budget will cover the interest. Another thing we like about this approach is that we’d be paying money to a bank anyway, I’d much rather these high returns go to people I know and actually have a relationship with. It becomes a win for us and a win for the private lenders we work with. That’s a win-win in our book and we’ll keep this strategy going for a long time to come.
Hard Money Lenders
Over and over again we hear people say something along the lines of them not knowing any private money lenders, so I’m stuck. Well… not exactly. If you do a basic Google search you will see there are numerous hard money lenders (HML) to help people just like you. All of these HML’s have different criteria, but generally they work like a bank but can close much more quickly (usually 7-14 days). HML’s will cost you a little bit more than private lenders- plan on paying 12-15% and usually a couple of points (a point is 1% of the purchase price). Again, build this into your budget before you buy the home so you know you have the spread to cover the cost. Keep in mind a HML will require the points to be paid upfront and will generally only cover 70-80% of the purchase+rehab cost. This means you will either need to have money to cover the other 25%, or bring in some Private Lenders to help you cover the remaining amount. Often times when bringing in a private lender in this scenario you will pay that person an agreed upon interest rate and give them some kind of equity split in the profits to compensate for their “risk” because they do not have first rights to the property.
Some banks have special programs to help renovate distressed properties so you’ll have to do some calling around to your local banks to find out your options. Generally if a house is inhabitable you can’t get a traditional loan, but you can sometimes get a construction or rehab loan to cover your costs. If the house is just a cosmetic fix and is technically habitable (doesn’t mean you would actually live there) you will have more flexibility and options with the bank. One trick is to start talking with smaller local banks (or even new banks) as they generally have more flexibility and are easier to work with than the larger banks of the world. You may get lower interest rates with banks, but there is more red tape and it will take longer to complete your project.
Now on to the rental options
When you’re flipping properties the funding is pretty straight forward with limited options. With rental properties, the world is your canvas. It’s time to get creative! We won’t cover all the options here but here are some common ways we have funded some of our deals.
We’ve shared in previous posts the power of getting a loan with a minimal down payment. Even though interest rates have risen recently, the money from banks is still super cheap and a viable option to look at. When looking at properties, keep in mind you can get a traditional mortgage on any property with 1-4 units, anything with 5 units or more will require a commercial loan which will usually require a down payment of 25% and will rarely be amortized over a 20 years period.
Just as we love working with private lenders to flip properties, owner financed deals are our favorite way to finance rentals. Again, it’s simpler with less red tape and you can generally get in with a lower down payment. Owner financed means that the person you are buying the property from is essentially willing to be your bank and allow you pay them over the course of a given time upon which you will pay the balance in full. For example, we bought a property using this strategy where the owner wanted $20k down and 6% interest. While the interest was higher than we could get at a bank we were happy to only bring $20k to the table instead of the $50k that would have been required had we gone through the bank. The other awesome part on this one is we brought a partner in on this to help split the down payment (and revenues), so we ended up only paying $10k to get this property. Which brings me to the next option… utilizing partners.
Real Estate is risky. It really is, and anyone who tells you differently is wrong. Obviously we have all kinds of checks and balances to ensure our investments are as safe as possible, but with rentals you can’t always predict what will happen with roofs or furnaces needing to be replaced, natural disasters, market downturns, nasty tenants, etc. To be honest, it’s a little scary thinking of what the worst case scenario could be with a given property, especially when you start getting more and more units. For that reason, we love working with partners to help split the down payment, ongoing costs, as well as the revenues. We have 4 properties with various partners and it has definitely help me sleep better at night knowing I’m not in this alone if we get that unwanted phone call that something happened to our property.
When just starting out, working with more experienced partners can be the thing that escalates you to finding your first property, even with flips. When you find a house you think could work, find someone who knows what they are doing and ask them to mentor you on the house. Even if you end up giving them a split of the profits, this is a very typical way for people to get started. It’s a great way to get a mentor to go in on a deal with you and help spread your risk in a given situation. You may not get to keep all the profits, but you will hopefully use their experience to save yourself money by avoiding rookie mistakes. Then when all goes well on the first project, you can continue working with each other in the future or if you’re confident enough at that point you can try the next one on your own.
There are multiple other ways to finance a property but I’ve probably already bored you to death. The reality is that you can get creative in real estate. If you think of a way to fund a deal, seek it out and give it a shot. We have found that the key is buying right. When you find a house at the right price the money will come and there are multiple people out there willing to partner with you to make that happen. Start building relationships with lenders, bankers, and potential partners so when you do find that deal you’ll be ready to pull the trigger.
Of course, if you have any questions about any of these options or other strategies, feel free to reach out on Facebook, Instagram, Twitter, or shoot us an email at firstname.lastname@example.org.