When I first got started in real estate investing I thought finding the money was the hardest part. Once I was educated and started surrounding myself with people that were doing deals I found this to be the complete opposite. It is my belief that finding the deal can be the hardest part. If you think about it there is so much money out there looking for a good risk adjusted return. I say risk adjusted return because there are asset classes that can out perform others but they take on more risk.
I have compiled a list of ways we raise money for real estate. This isn’t a complete list but should get you started.
BUY PROPERTY WITH FHA / TRADITIONAL LOAN
This may be the most traditional way people are used to buying homes and may be a great way if you have time and meet all of the requirements. I prefer to use loans like this when refinancing out of short term money into more long term loans as they generally have better terms.
You will have a hard time getting this type of financing for properties that need a lot of work or deals that you need done quickly
HARD MONEY LOANS
Hard money can be a great way to fund deals. Hard money is generally money that is pooled from individual investors or a large credit line that is then lent out to real estate investors. It is my experience that hard money generally costs more than other financing options and is generally short term. You want to make sure that you understand every part of the contract / terms if you ever use hard money (or any other option) as there can be lots of hidden costs / fees. There are hard money lenders that don’t perform credit checks or income verification as their main concern is the viability of the deal. Most hard money lenders are going to want you to put some of your own money in the deal. For that you can use alternative means discussed on this page.
NON-BANK MORTGAGE LENDING
With difficulties qualifying for mortgages, a string of nonbank lenders, such as SoFi and LendingHome, are taking market share from traditional banks. According to PwC, their market share could grow to $150 billion by 2025, a 33% annual growth rate. Unlike big banks, which take a long time to look at income, FICO score, tax returns and more, online lenders can process the application online in 20 minutes. They can close the deal in two weeks vs. 45 — 60 days with banks sometimes funding up to 100% of the purchase.
This is one of my favorite ways to fund deals as you can get very creative. There are so many ways you can use seller financing. This includes: lease / option, subject-to, contract for deed, mortgage / deed, and others. This can get very tricky as there are lots of variables that need to be considered and you should always use a title company or attorney to close these types of deals to make sure the proper process is taken. Using this type of strategy the seller is actually funding the deal for you which allows a lot of flexibility.
Do you have a rich aunt or uncle? If so, they could be your next lender. Private money generally comes from a single individual that you may have a relationship with. They can get the money from anywhere including their 401K, HELOC, Whole Life Insurance, Etc and then lend it to you. It is my experience that private money has more flexibility than other options which makes it a great option to fund deals. You want to make sure you do it correctly as you don’t want to violate any SEC (Security and Exchange Commission) rules so always consult a professional.
I bought my first home on a credit card as I had no money! I was super excited and it was only $30,000 so I went for it! You really need to understand what the terms are and how to liquidate the cards without paying the cash advance rates. There is a lot to this so you want to make sure you are doing it correctly and legally as you can get in trouble if you break the laws. There is lots of opportunity to get 0% interest cards and cards in your business name that may not affect your personal credit score once you put a balance on them.
IRA / 401K / HSA
You may be able to borrow up to 50% of your 401(k) balance, with a maximum loan amount of $50,000 (if your 401(k) administrator allows loans. This is if you are currently working at the job that has the retirement plan. If you left a company you can roll your IRA / 401K into a self-directed account and invest it in anything permissible by the legal code. This includes real estate.
WHOLELIFE INSURANCE POLICY
The Infinite Banking Concept allows individuals to create their own banking system using a life insurance policy. This is an excellent strategy for acquiring real estate investments, due to the ease of access to capital, and the ability to invest without restrictions. This method is not at risk to market volatility, and the payback structure is flexible.
A HELOC (Home Equity Line of Credit) can be a great way to fund a deal. You are essentially using the equity in your house. Once you pay off down the HELOC you can use it again. This is what differentiates a HELOC from a loan. With a loan you get a large amount of money and once it is paid back you must reapply for the loan. It is my experience that HELOCS also have less origination fees and you only pay interest when you draw on the line. You are also putting your home at risk when using this strategy as you now must be able to cover the monthly payments so make sure you consider all aspects.
There are a lot of people out there that have money and are looking for deals. If you can come to an agreement you can work together for a win — win solution. They essentially fund the deal and you would do the work or whatever agreement you agree upon. Handled correctly this is a great way to fund deals fast. However, I must warn you that you do want to consult an attorney with anything you do as it is very easily to violate SEC (Security Exchange Commission) rules if done improperly.
The 203(k) loan is similar to an FHA loan in that it’s geared more toward homeowners than investors. It is an owner-occupied, 3.5% down loan that allows you to lump the rehab costs into your mortgage. You might, for example, consider a 203(k) loan if you want to purchase a distressed property for $100,000 that needs $35,000 worth of rehab work. Your loan amount would be $135,000 to include the cost of rehab.
Generally speaking, crowdfunding websites occupy a similar market niche as hard money lenders. They’re not quite a mainstream borrowing option and they tend to be expensive, but they also tend to be relatively quick and provide a shorter-term funding solution. That makes them a strong option for acquisition and renovation financing. For rental investors who like to pay back their loans over an abbreviated time horizon (say 5-10 years), they may find a crowdfunding option that suits their needs, but don’t expect a standard 30-year mortgage. Check out RealtyShares, Fundrise and PeerStreet, among plenty of others, to learn more about their requirements and loan options.
PRIVATE PLACEMENT MEMORANDUM
A private placement memorandum (PPM) is a legal document provided to prospective investors when selling stock or another security in a business. It is sometimes referred to as an offering memorandum or offering document. A PPM is used in “private” transactions when the securities are not registered under applicable federal or state law, but rather sold using one of the exemptions from registration.
The PPM describes the company selling the securities, the terms of the offering, and the risks of the investment, amongst other things. The disclosures included in the PPM vary depending on which exemption from registration is being used, the target investors, and the complexity of the offering.
Cross-collateralization occurs when more than one property is used to secure a loan or multiple loans. For example, a person owns Property A and wants to purchase Property B without using any of their own funds. The bank can use both properties as collateral for the new loan.
There are so many ways that you can combine multiple strategies above. You can also do things like using your realtor commission as down payment or getting a credit on the closing statement instead of getting a lower price. If you want to learn more visit our website www.valleyinvestmentclub.com or visit our office in Phoenix, Arizona where we have weekly masterminds and property tours.
INVESTING INVOLVES RISK. PLEASE CONSULT YOUR TEAM OF PROFESSIONALS BEFORE ATTEMPTING TO USE ANY OF THE METHODS ABOVE.
IF YOU WANT TO LEARN MORE PLEASE VISIT OUR WEBSITE AT: WWW.VALLEYINVESTMENTCLUB.COM AND SEE HOW YOU CAN JOIN OUR TEAM OF REAL ESTATE INVESTORS.