As we’ve discussed previously, the number one problem for the majority of new investors is that they are unable to find their first deal. The second biggest problem for new investors, or occasionally experienced investors, is finding the funding for your deal. However, my decade-plus worth of experience has showed me that these problems are more or less excuses! One must first understand and be aware of the different types of lending when it comes to real estate investing, rehabbing, or flipping. I will list them below and we will expound on them much more in the very near future. Here are the types of lenders: 1. Hard money lender – aka “HML,” this is an easier route as they’re in the business to loan you money. 2. Private lender – obviously “private lenders” can lend you money but is not considered an “institutionalized” lender. These usually come from immediate circles of influence such as a doctor, attorney, church member, friend, or family member. 3. Lines of credit/cash – aka “LOC, Business LOC, or credit cards”. This is borrowing money on a line of credit or a credit card. I know of several investors who have bought and rehabbed investments using only a credit card. Especially with low or no interest rates. Cash, this is obvious. If you have the cash, you’ve got the house. 4. Self-directed IRA/401K – this is using one’s 401k or IRA money or using someone else’s 401k or IRA to loan you capital 5. Joint Venture or JV – finding an investor who will put up 100% of the money for the purchase and rehab and then split the profit on the backend. This is a very popular source of funding As I mentioned earlier, we will expound on each of these in future blog articles. We’ll talk about how they work and how investors use this type of funding. Usually, investors don’t only use one source of funding. They use multiple sources of capital. In my opinion, the most successful way to use lenders is to utilize all avenues of funding! When it comes to accessing capital for your rehab, you don’t need to have liquid cash in your bank account. You just need access to someone who has funding available. Don’t sit around and wait for all of the money to be into deposited into your account in order to buy a house. I simply grab my Rolodex and call my lenders directly. A lot of investors both teach and state, “find the house and the money will find you“. There is an element of truth to that statement but the market is always tough and depending on the area, the inventory might be low. This is why the investors who already have access to funding are usually far more successful. The capital is already there so you...
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During the series introduction, I listed five funding sources for every investor. In the introduction, I merely skimmed over the five funding options. However, we’ll be discussing each funding option in more detail, beginning today with “HML” or Hard Money Lending. A hard money lender is a very easy route for investors. Why? Because HML’s are in the business to loan YOU money! It’s how they make money. As I mentioned previously, any investor worth his salt uses or at a minimum, has access to all five lending sources that I listed in the series introduction. In my opinion, HML’s are the easiest way to access funding. This is especially important for inexperienced investors. These beginner investors have a tendency to become obsessed with finding the cheapest “private” money, meanwhile, there’s an HML right up the road who is in-business to loan you money! Sure, maybe his terms are not exactly what you want but remember, don’t step over a dollar to save a dime! Hard money doesn’t necessarily have to be your only source for funding but it should take priority as the easiest way to get funding for your first flip. I just so happen to be in the middle of several large flips. I am currently closing on a home with a $500,000 purchase price. Yes, my other flips use other sources of funding, but for this one, I needed a hard money lender because of the price. I am in no-way a beginner investor as I’ve spent over a decade in the industry – but I still use hard money lenders for certain situations. Especially situations in which the purchase price is a little higher and I need guaranteed approval. How does a hard money loan work? An HML loans you funds to both purchase and rehab your investment. In most HML cases, one has to come to closing with roughly 10-20% down depending on the lender. HML’s will give you the option of a six or twelve month plan. I recommend a twelve month plan. Six months can work if everything goes perfectly. But if things don’t go as planned and the home doesn’t sell, the HML can foreclose or charge additional points or interest. HML’s make their money by charging you points/interest. One point equals 1% of the total loan. Interest will generally be anywhere between 12-18%. HML’s typically do not charge a pre-payment penalty so one can pay off the loan amount at any time without being charged additional monies. One will usually receive the rehabbing construction funds in several draws. These draws can be set-up in many different ways. For example, let’s say we have a $30,000 rehab project. In this case, one would typically set-up three separate $10,000 draws. You would then proceed to complete $10,000 worth of work and then...
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Last time, we discussed HML’s or “hard money lenders” and how they work. Today, I want to go over another source of lending. Lines of credit, business lines of credit, credit cards, and cash. This is borrowing money on a line of credit or on a low-interest credit card. Cash is obviously your best and safest funding option. The “rub?”. You have to have access to a large amount of cash! Most investors don’t have large quantities of liquid capital available, especially new investors. Cash is indeed “king” and if you have it, you’ll likely get a much better deal from your seller. However, in my experience, many of those who have the cash on-hand do not want to put it all out there on the line, they’d rather leverage it for multiple concurrent deals. Credit cards are often never even considered by investors. However, I know of several investors who have bought and rehabbed many investments using only a credit card. This is an especially good option when the credit card being used has super-low or no interest rates. I mean, that’s basically free money! Using a credit card is a funding option that many investors who have great credit miss out on. In fact, right now, one of my investor friends is doing a joint-venture (JV) deal with me and is using his credit card for the entire purchase. Quite literally, he has perfect credit and has 30-40 low or no-interest credit cards with very large limits. He built his credit up for years and once he decided to begin investing, his fiscal discipline paid off. Also, he literally can fund all of his own deals at almost no cost! Virtually everyone takes a credit card for payment these days. All it takes is an iPad and a square machine. Heck, with the right equipment, a vendor can slide it right through their smartphone on the spot! There’s also ways that you can get cash out of your credit card account. You can set-up whats called a Merchant Account which gives you the option to pull cash from their credit card and deposit it into their Merchant Account, which will then be paid out in cash. This links your credit card with you Merchant Bank account. Merchant Accounts are quite popular. Some examples are Amazon, Ebay, Paypal, etc. And for those who have some dings on their credit, there are companies out there that specialize in helping you build and repair your credit. Once they repair your credit, they will help point you in the right directions for lenders with better limits and interest rates. These entities will basically build or repair your credit. Now, let’s talk about LOC’s, or “Lines of Credit.” A line of credit is an amount of credit extended to a borrower by a bank or other financial...
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At this point in our “Finding Funding” journey, we have already briefly discussed the many different avenues of funding for real estate investors. We’ve discussed hard money lenders, lines of credit, credit cards, and cash. Today, I’d like to cover two more funding options: Private Money Lenders (PML) Self-Directed IRA/401k (SDIRA) PRIVATE MONEY LENDER: (PML) PML’s are the most lucrative avenues of funding that you can find. The next questions is, “why?” It’ simple – PML’s provide you the easiest and most profitable payment terms. However, they are typically difficult to locate and even if you do, you need a lot of experience under your belt just to reel one in. Every beginner investor that I know, including myself, make mistakes over the course of their first few flips. It is, in my opinion, the best way to learn – from our mistakes. One of the biggest mistakes that beginner investors make in their attempt to locate a good funding route is by spending far too much time attempting to locate a solid PML. However, in almost every single case, a PML is not going to loan capital to a new, untested, unproven real estate investor. And most PML’s that I know aren’t even lending all that much in real estate anyway. These are sometimes family friends, family members, doctor or attorney friends, or an affluent person in your direct circle of peers. But let’s just say you have contacted someone who is willing to loan private funds to real estate investor. However, he is concerned that you do not have any flips under your belt. Again, PML’s likely won’t loan to an investor who’s never completed a flip. You’ve got no experience yet you’re asking for a whole lot of money. But you don’t yet specialize in flipping and he doesn’t specialize in funding – this is a recipe for disaster! This is a good time to use another funding source (HML, LOC, CC, etc) and complete your first flip. You’ll get that PML once you’ve proved yourself. The advantages of a PML loan are awesome – No points Low interest: 10-12% No monthly payments until the deal closes I’ve seen situations in which private money lending has separated families and ruined relationships. Maybe your uncle wanted to help out and loaned you $100,000. But the flip turns sour, the house won’t sell, and you’re losing money. At this point, you’re uncle has to take over the project. This obviously causes immediate strife. Get some experience under your belt and then go after that PML with a proven portfolio. Don’t start out looking for private money. It’ll likely not pan out for you and will be a waste of your precious time. SELF-DIRECTED IRA/401K: (SDIRA) There is more money available here for rehabbers than anywhere else you can go. There’s...
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