It’s no secret that one of the largest obstacles that new real estate investors face is finding funding for their “great” deals. Even though this can be a challenge, it is, in fact, possible. Finding funding takes a combination of networking, working your personal contacts and the ability to present yourself and what you can bring to the partnership.
If you don’t have the funding, you had better have access to deals. What is most often overlooked is that financers look at you and how you present the deal almost as much as the numbers themselves. If you can work to find deals and put your best foot forward, finding financing is not as difficult at you may think.
Do you need money for real estate? A common complaint people go on about is that they don’t have the money to invest in real estate. However, is that truly what holds somebody back from real estate investing? If they had the money in the bank, would that end their concerns about investing in real estate? Actually, there are more things you should worry about regarding investing before the money should even become an issue to you. This article is going to let you know what you should worry about before you even think about how you don’t have the money to invest in it.
The first step to finding funding is with finding good deals. You will find that this process is just as difficult, if not more, than finding funding. In this stage, you need to align yourself with realtors, attorneys, mortgage brokers and anyone else who can provide access to deals on the ground level. You need to be able to get properties at a severe discount to entice buyers to want to move forward.
How to get started on your portfolio
So many people talk about how well they’d do in real estate investing if they only had half a million in their bank account, since money is the issue. The thinking is all wrong. They see a few homes in an area that look like great investments and if they had the money they’d buy them right now, sell and fix them all up and make a few hundred thousand dollars.
Money is not the biggest problem in real estate investing. The biggest problem is actually scoping out great deals. People find a deal that they think they’ve got all worked out. One that they think will prove to be extremely profitable. However, they’ve worked out these deals to where their risk is drastically reduced, but they haven’t figured out a way to completely maximize the profits.
You’ve got to find great deals first
Having access to lots of money to involve in real estate can actually be detrimental to real estate investing. It can cause you to make poor, expensive decisions. You’ve got to actually know what a great deal is. When you’ve got a great deal on your hand, money won’t be an issue. Money is an issue when you have so-so deals. The hard part is finding great ones, and getting a good education. There are lots of average deals out there. Now, let’s talk about money.
Using bank money
Banks lend more than they’ve actually got. However, due to the way that our financial system works, they don’t really lose money if a deal goes sour. Perhaps they lose the payments on interest, but they don’t lose any of their principal. So, if something goes wrong, your credit will be destroyed, but you don’t necessarily lose any money. That’s one of the wonderful things about borrowing money from a bank.
What’s bad about bank money?
It’s no secret that in order to buy a house you must have credit and a down payment (mostly). Getting money from a bank lender can prove difficult, but in the end it’s great because nobody really loses any money if something happens. Yet, real estate investors tend to look for private money.
What’s the deal with private money?
Private money is where someone takes money out of their savings or 401K to lend money to you. This can be a member of your family, an acquaintance, or a friend. In a nutshell. The issue with people who try to get private money is that you shouldn’t be doing it if you aren’t successful. It’s risky to play around with somebody else’s money. If that money is lost, it’s truly lost and gone forever. When you deal with private money, you are playing with other people’s lives, because they can never get that money back.
There are so many instances where someone will use private money and the deal goes down. If you aren’t exceptional at the real estate business and know for sure what you are doing, private money is a bad idea. However, if you are a great investor, here’s how private money could prove useful to you:
The advantages of private money
▪ Private money can be great for down payments. If your goal is to get a bank loan for the majority of the price of the property loan, you might need help with the down payment
▪ It can be helpful if you need money for the renovations. The bank may give you a loan for the house, but you’re going to need money to renovate it
▪ Private money can also be useful if you need help with the whole balance. Maybe you need help with the entire balance
In situations where private money can earn between six to ten percent on someone’s money, then that’s obviously much better than any other investment option that they have. It could actually help someones 401K.
You’ve got to be wise
Don’t think that you need to raise private money in order to secure an investment. The point is that yes, it can be useful and at times more beneficial. But too often, new investors try to get private money because they don’t really know what they’re doing. It’s generally those deals that go bad because having real cash in your pocket can be dangerous. When you’ve got to work out a loan, and all the details that go with it, you’re more cautious. People tend to be more frivolous with cash. That is why bank money is typically the safer option; nobody really loses money or gets hurt like they can with private money. There are actually other options regarding getting money for a real estate deal.
Now, if you’re just getting started, and you can’t get a bank loan, and you don’t want to play with your uncle’s 401K and his livelihood for the future, what do you do? Well, I want talk about two really great options.
What is hard money?
What is hard money? Hard money is pretty similar to private money, except it is people that lend money to investors. Typically, these people have been doing it for a long time. These people are extremely beneficial. They are generally very educated in the real estate field. Hard money lenders will often lend someone around sixty-five percent.
Hard money is fantastic, because what they lend you is based on the specific deal. Because they are actual real estate investors, they know what they are putting themselves up for. Private investors typically don’t really have any idea what you’re using your money for, whereas hard money lenders do. They have experience and know for the most part what will be a great deal, and what won’t.
They can also be very beneficial in terms of helping you find a great contractor since they’ve seen so much. Generally, a hard money lender isn’t going to give you money if they don’t think its a good deal. Therefore, they usually are on your side.
Transactional funding is pretty new. It’s actually about five years old, perhaps less. These people lend you money because you’ve already got another buyer lined up ready to close on the property; you’ve however, still got to buy it.
Usually, you need earnest money that is non-refundable. It’s a lot easier if the new buyer pays straight cash instead of a loan. This is great because you can get the deal under contract and then go find a buyer; afterward, you can use transactional funding.
Transactional funding is a fantastic idea for new real estate investors. It lets you get into the industry without putting up all sorts of risks. Why? Because you’ve already got the new buyer, you’ve learned skills about finding the investing deal, and getting rid of it. With transactional funding, you’ve already got the buyer. With hard money, you’re in a bind still if you can’t find a buyer. With transactional funding, you’ve already got the buyer.
Owner financing is fantastic; you basically have the owner be the bank, and you pay them every month. You can choose the interest rate that they give you; whether low or high, it’s your decision. Of course there is negotiation. You don’t automatically get to set the interest rate. But in short, the seller becomes the bank in owner financing.
Another option is called a “subject to.” This is where you take over an existing loan. For example, a bank loan that somebody else got on their house. So why would you take over a loan when you can get a new one? Well, the answer is that oftentimes the current owners loan has a far lower interest rate than yours would be. Yes, you can go to a bank as an investor, but they’ll give you a higher interest rate than the current owners will be. Interest rates are much lower if you purchase a house that you live in, because the default rate is much lower. What’s great about “subject-to” loans is that you:
With a Subject to:
▪ aren’t really going to a bank
▪ aren’t going to a private lender
▪ aren’t going to a transactional funder
▪ aren’t getting money from friends, family, or strangers (private money)
▪ aren’t financing through the owner
▪ you just are actually taking over the current mortgage on the house
There really are a surplus of options
It’s surprising how many options there are to get funding for a deal. For the most part, the most critical component is finding a great deal; otherwise, it doesn’t matter what kind of funding you use, because the money will be lost regardless. But, if you design the deal correctly, you’ll find that your options will get bigger in terms of funding. Above all, it’s not good to do a deal of any kind unless you really know what you’re doing. Particularly if you’re going to waste somebody else’s money while doing it. Losing your own money in a real estate investment is one thing, but losing somebody else’s is a different ballgame. You’ve got to know exactly what a good deal is. One way to know is if a lot of people are wanting to put money toward it.
Once you fully know the market and have deals coming in, you can start looking for financing. There are also many outlets for hard money lenders and even traditional lender financing options that you have at your disposal. Just because you do not have a surplus of your own money available is not an excuse not to be closing deals. If you network yourself and work your contacts diligently, finding financing on your deals will eventually be considered the easy part of the process.
Be sure to educate yourself; if you’ve got to spend some money to do it (think: getting a mentor), then do it. The money spent on your education will be pennies in the bucket compared to what you’ll make in real estate investing when you know what you’re doing. One bad deal can cost you a serious amount of money. Far better to spend a little time and money learning how to do real estate than trying to start off on your own and making some horrible decisions that prevent you from moving forward in the business.