I realize I didn’t write a blog post last week and if you look forward to this every week I apologize. I had so much going on over the last couple weeks that something had to give and instead of writing a post I spent the time with my family. I’m sure you all understand and agree with that prioritization.
I entitled this post “Finding The Money” because that can be an issue in this business. There aren’t many banks out there who are ready to write checks to house flippers or short term real estate investors. The banks want long-term income producing assets right out of the gate so they know they will make money on the loan they underwrite. On top of that, if you have tried to get a bank loan in the past few years you will know that it takes an act of Congress to get it approved even if you have an 800 credit score and make a million dollars a year with no debt.
So, how do real estate investors fund their deals? I am going to go through some of the ways that I know to fund projects, all of which I have used at one time or another.
IRA / 401k
What do you invest in with your IRA or 401k? I suspect the answer most of you said is stocks and bonds. How much money did you make in the stock market last year? Well, I use my IRA and 401k to invest in real estate and I bet I made more than you did last year with an asset that I got to choose. I still invest in the market so I am constantly comparing my returns. I can’t use my retirement account to invest in my business without tax implications so I loan my money to other house flippers who give me a great rate of return on my money. It really is a win/win because I am happy with the return, it is backed with a hard asset most of the time, and they are getting money to fund their projects. I have written a post about this concept in the past if you are interested in how it works. If you want to get started investing using your IRA or 401k then send me an email, firstname.lastname@example.org or give me a call, 850-483-1761 and I can help point you in the right direction. You can read that post on Self Directed IRA / 401k here. There are many ways you can use your retirement accounts to include lending, buying rental properties, and even investing in commercial real estate or another business.
This money comes from those friends or family members who have money in CDs, bank accounts, money market accounts, or even in the stock market and they aren’t making as much money as they would like. Each one of you reading this would likely be considered private investors if you contacted me to discuss investing in my business. We would talk about where your money is now, how much you are making, what your desired rate of return is, what your risk tolerance is, when you think you would need the money next, etc… From there, we would discuss some options and find a plan that works for both parties to ensure everyone is happy. I have a few private investors right now to include friends and family members who help to fund the projects we have going on currently. They are protected with a promissory note and/or a deed of trust on the property depending on the amount invested. I won’t list specific rates of return for those people here but I guarantee they are making more money than they would be in the bank or market and it is completely passive for them. Some want to see the progress along the way but most just want to cash the checks when they come in. I am looking for more private investors in the company soon so if you are interested feel free to contact me.
There are companies out there whos entire business model revolves around lending money to house flippers and landlords. They have found a niche in lending which provides capital quickly for what are typically short-term projects. This is a great way to expand your business and allow you to fund more projects than just using your own money. These loans come at high interest rates, increase your risk, and reduce your profit margin but the right deal would certainly lend itself to this kind of funding. They are called hard money loans because they are backed with a hard asset, the house itself. So, if you stop paying the loan the house will quickly become the asset of the hard money company. If you want to know more about hard money lending, reach out to me and I can point you in the direction of a few lenders I know.
This is a pretty new concept in real estate and it falls into a similar category as hard money lending. The rates from these companies seem to be slightly less than most hard money lenders I have seen but not by much. What these companies are doing is taking on private investors and using their money to fund the projects they are underwriting. It’s basically a middleman service to provide short-term capital to real estate investors, just like the hard money lenders. We have seen this for businesses over the past few years with Kickstarter and other crowd funding platforms. I’m interested to see where it goes in real estate and if there is any legislature that comes down on it in the future.
A joint venture partner is someone who a real estate investor partners up with to get a project done. They bring value to the table in some way or another and get an equity split on the project. For example, an investor may partner up with someone who brings all the money to the table for a renovation project while they provide the deal, the project management, and everything that goes along with it. In that case, the money partner only has to fund the project and work out a split on the back end when the project is finished and sold. Another example would be a new investor who brings me a house they found and got under contract, but they don’t have the first idea of what to do from there. In that case we may partner up on the project and come up with an equity split for them finding the deal. There are all kind of ways to structure these partnerships but this can be a great way to find money for your projects.
Some real estate investors use all of their own money. They may have saved up money over time or have been doing this long enough that they have the capital needed to purchase and rehab their own properties without any leverage at all. That is a good problem to have! We use a lot of our own money in the business and supplement that with the methods you see above. However, I find that most investors starting out don’t have any money so the above methods are the key to getting started. But, if you have it, feel free to use it…
Bank Loans / Portfolio Loans
As I said before, these are difficult to get but if you can get in with a bank and convince them to fund your projects, do it. These loans are typically at low interest rates and great terms. However, unlike any of the above methods of finding money, they come with a LOT of red tape to cut through. You will want to look for a local bank that keeps loans in house and you will typically be dealing with the commercial department of that bank. I have met with quite a few local banks over the last year in an attempt to find funding and haven’t been overly successful. I find that they aren’t that interested in loaning short-term money and the speed at which they can close a loan (I use speed in a SLOW capacity) is completely insufficient. Since we don’t buy a lot of houses off the MLS, the sellers typically want to move quickly and get their house sold as soon as possible. Additionally, most of the houses we buy would not qualify for a loan so the bank is no help there either.
Alright, what did I miss? How are you finding money for your deal? However you are finding the money, the key is to find the deal and if it is a good one, the money will come. This concept is difficult for new investors for some reason and they may have the opposite mindset. However, pretend for a second that you have a lot of money just sitting in your bank account making 0.1% interest. If I came to you and said that I want to borrow $100k of your money at a set interest rate but had no property to put it in yet, what would you say? Instead, if I came to you with a property I had under contract, photos of the property, a renovation plan and budget, recently sold comparable properties from the MLS, and a projected profit and rate of return for your money, what would you say THEN? I rest my case.
If any of you reading this want more information about funding your deals, please reach out to me via email, email@example.com or leave a comment below. Don’t forget, I lend money out of my IRA so I’m not just borrowing money I am also lending it.
Lastly, if you are interested in hearing more about how we can work together on a project with you coming in as a private lender with your own money or your IRA / 401k, please reach out to me as well. If you aren’t self-directing your IRA into real estate and are unhappy with your returns in the market, you need to!