How to Buy Real Estate and Never Need Any Money
I was listening to an investor talk about how he had bought over 100 properties and was able to secure 20 different bank loans. He went into elaborate details of the loan applications, cross collateralization, personal guarantees, consolidating LLCs and various gyrations the lenders made him do to get the money. He did a lot of work for not a lot of money.
Another investor who had bought and sold twice as many properties balked and explained how he never borrowed any money – what was the difference between these two investors? The second investor actually couldn’t borrow any money so he had to get creative. When the declines of 2007 – 2008 happened, the first investor got wiped out and went into multiple foreclosures and ultimately bankruptcy.
The second investor who had borrowed other people’s money went through the same market conditions, but didn’t lose any money or any points from his credit score because it wasn’t his money. Hindsight has 20/20 vision and as the second investor bragged about his experience, he failed to mention that he had already been through two bankruptcies and was dead broke when he started his real estate investing career.
Personally, we sold every investment property we had in December of 2006 simply because of the heated conditions of the market and the mortgage resets that were coming. This move was the culmination of about 15 years of buying real state with creative financing techniques and using other people’s money (OPM).
Depending on the sales ability of an investor, he may be able to talk potential investors into lending him money to buy and sell properties even if he hasn’t actually done any deals. Generally, investors are easier to work with if the investor has a track record of any kind. If you are telling people about your history in real estate investing, tell them the truth rather than lie about your experience. This may lose you some funding but it is better than to raise the investor’s expectation to an unreasonable level.
Your competition for the investor’s “safe money” is saving accounts and certificates of deposit. Interest rates on these bank instruments are at 25 year historic lows so your cost of money needs only to be in the 6% to 8% range. I always offer 6% interest paid monthly or 8% paid when the property is sold.
As examples, on a borrowed $100,000 at 6% payable monthly, the interest only payment would be $500. On the same borrowed $100,000 held for six months, the payoff interest amount would be $4,000. Paying the interest at the closing helps the investor’s cash flow during the rehab and selling period. Usually the more informed individuals will choose the 8%, while the less trusting lenders want to see a check-a-month to feel secure.
In summary, becoming long term successful as a real estate investor, with minimal personal risk, will require using other people’s money to do the purchases of your target properties. Most people will turn you down initially, but stay in touch and tell them of your progress, most often greed will bring them back to you. In the worst of circumstances a few private lenders may want more interest on their money or a part of the profit from the property. Stick to your guns about what your offer is but make sure you ultimately get private lenders’ money to finance your deals. Be careful of advertising in newspapers because you could be construed by the regulatory people as making an unregistered public offering.