Want Money for Real Estate?

Money_for_Real_EstateWant money for real estate? A common concern many people express is the problem of finding the money for investing in real estate. But is money really what is holding most people back? In other words, if they had an extra $500,000 in the bank, would that solve the majority of their real estate investing challenges? As you’ll discover, there are bigger issues to deal with prior to money being a problem. There are several very important details that need to be buttoned up before worrying about money for real estate.

 

$$$ For Real Estate

 

Getting Started

 

The 30,000 Foot View of Money

 

So often I hear when I talk to people that are first getting started, or those that are really trying to get into the business, they always share with me that their biggest problem, the biggest issue they have is money.

They tell me that if they have the money they could do a lot of deals, and that they’d make all this money. I would argue that if you took a poll of 100 people right now off the street, kind of like a Family Feud, “Survey says,” the majority of them would tell you that if they had, say, $500,000 in their bank account they could be successful at real estate investing because that’s the biggest problem, money. They would typically point to, “Hey, there’s three houses down the road that are great deals right in my own neighborhood. I just don’t have the money, but if I did I’d rip them up, and I’d resell them. I’d make all this money.”

 

The Real Problem

 

I am not convinced that money is the biggest problem in real estate investing. In fact, I would argue the biggest problem is great deals. Great deals are what’s missing. I have a lot of friends and associates that are lending money for real estate investors, and they always tell me their biggest problem has nothing to do with their lack of money. It’s the lack of great deals that students or investors bring to the table. That they’re structured correctly. That they’ve been done in such a way where they reduce the risk, but maximize rewards. Great deals is what’s missing.

 

Great Deals

 

Now, great deal presupposes something really important, that somebody knows what a great deal is. Finding the great deals, structuring them, negotiating them, putting them together with the right paperwork, yes, that is incredibly important. It also means you have to know what they look like. One of the biggest problem with money, when you have access to a lot of it for real estate, is it can enable you. Money can be an enabler. It can enable you to make bad decisions that can be very costly.

. It starts with a great education, and the ability to find great deals and structure them. Because when you have great deals then the money options open up, and that’s the key to this.

Money is really not a problem when you have great deals. Money is only a problem when you have marginal deals. There are a lot of marginal deals out there. You can find tons of bad deals. They’re everywhere. The challenge is finding good deals and getting educating. What I’m going to do now is I’m going to break down these different options because this goes into a whole new subject matter that I’m really passionate about. Let’s talk about bank money.

 

Bank Money

 

Banks loan up to 10 times as much money as they have in their vaults. Here’s what I mean. Let’s say they’re going to lend $100,000 for someone to buy a house. Technically that bank only has about $10,000 in their bank account to lend this amount of money. How does that work? Well, welcome to our financial system. Banks lend 10 times as much as they have in deposits, so that would be like you if you have $10,000 in your bank account right now lending your neighbor $100,000, and getting interest on $100,000 when all you really have is $10,000. That’s our banking system in literally three sentences.

Here’s the beauty of bank money. If the deal goes bad, and the bank only gets, say, $50,000 after, says, a foreclosure or something, did they lose any money? They lost maybe the interest payments, but did they lose any of their principal? Uh-uh (negative). No. In fact, they’re still ahead $40,000. They’re okay. They’re fine. They give this $40,000 back to the Federal Reserve. The Federal Reserve is neither federal nor a reserve. Different topic. I The beauty of bank money is that if things go wrong no one’s really hurt. Now, yes, your credit may be hurt, no money is actually lost, and that’s one of the great things about bank money.

 

The Issue With Bank Money

 

Now, as you probably know the problems with bank money are pretty simple. Everybody knows those. You have to have credit, and you have to have a down payment in most cases, and all sorts of other things. Bank money has it challenges, but what I like about it is that if money is lost no one’s really hurt. Why is that so important? Because with real estate investors there is a propensity to want to go find private money.

 

Private Money

 

Private money is where you have a friend, family member, you have an acquaintance, somebody is going to take money out of their 401K or just out of their savings, and they’re going to lend that money to you. That’s what private money is. My concern and my problem with a lot of people who try to raise private money is I don’t believe that they should be doing it because they’re not successful enough to be playing with somebody else’s money. Because when you raise private money, and if you lose that money all of it’s lost. It’s not like a bank where there’s leverage there. This is other people’s livelihood.

 

Bad Deal Example

 

The number of deals that I’ve seen go south where private money people have lost money it’s brutal. There’s a deal today that’s going to tax auction here in my area. The person had gotten an $80,000 private money loan from a local guy who owned a plumbing company here, and it’s going to tax auction for $6,000. Now, it may end up bidding up about $10,000. I know those numbers are small, but this house is in the ghetto. The private money lender’s basically going to lose all $80,000. That’s brutal. I am not a huge fan of private money for people that aren’t already really good at the business and know what they’re doing.

 

Upsides to Private Money

 

Once you are good, and you do know the business well private money can be nice.

  • It can be used for down payments. If you’re trying to get a bank loan for the majority of it, maybe you need help with a down payment.
  • Maybe you can help with rehab costs. Maybe the bank will give you the loan, but you need the rehab money.
  • Maybe you need help with the entire balance. I’ll put entire balance here. Where it’s secured money against that real estate, and that can be good.

Private money, if they can earn 6 to 10% on their money that’s a lot better than, say, a lot of other investment options they may have. It’s not that private money can’t be a win-win for, say, your uncle’s 401K.

 

Be Smart

 

The difference is you have to be wise about it. I am really concerned when I see newer investors trying to raise private money because they don’t know what’s going on yet. Often times it’s those deals that go south because like I said earlier in the video, money can be an enabler. It can help somebody get into a real estate deal that’s a lousy deal they should have never gotten into. That’s what I like about bank money is that even if things go wrong no one’s really hurt, whereas with private money people are hurt when things go south. There are other options, by the way, so let’s talk about those real quick.

 

Options

 

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.

 

Option 1 Hard Money:

 

It’s kind of like private money, but it’s people who lend money to real estate investors. They’ve been doing it a long time in many cases. I love these people. These people know as much about real estate investing as anybody you’ll ever meet in many cases. They may not want to teach you anything, but they know what’s going on. It’s because they’ve been burned a lot. They’ve lent money to other investors and they’ve learned the game. Hard money lenders usually lend somewhere in the range of about 65%. Sometimes up to 70%, but usually 65% of value.

 

The Problem

 

Now, right there that already creates a huge, huge hurdle for many people. Finding a deal at 65 cents on the dollar. That’s a good deal, isn’t it? What do those numbers look like? Well, for a $200,000 house that would be, what, $130,000. As you go up it even gets more and more difficult because now you’re starting to really get a steal of a deal. At $100,000 that’s a little more reasonable to get it at 65%, although it’s still challenging.

 

The Upside

 

Hard money is a great option because they’ll lend you based on the deal. They are real estate investors, so they know what they’re getting themselves into. It’s not a private money lender like your cousin, who you’re using their money and they have no idea. Hard money lenders know what they’re doing, and they’re also very helpful sometimes as you’re going through a deal.

They may be able to help out with the name of a contractor or those sorts of things because they really know the game. In fact, there’s a local hard money lender in Orlando that he’s been in the game forever. He just really knows his stuff. I really like this option for new investors because if you can do some of these deals, find good deals that fit for a hard money lender, use their money, do the whole deal, that can be awesome. That gives you a great education, and you probably aren’t going to get hurt because the hard money lender would have never probably lent you the money if the deal was a bad deal. There’s already that natural checks and balances. Does that make sense?

 

Transactional Funding

 

This is a relatively new one. This has only been around for about five years, maybe a little bit less. This almost brand new kind of stuff.  These are people that lend money because you already have another buyer lined up to close. Now, you still have to buy it, so maybe you buy it at $100,000. That’s your purchase price, but then you’re selling to the new guy or girl for, say, $120,000. That’s the sale price, so you may have to own this for, I don’t know, a week, three days, sometimes even just an afternoon. You buy it at $100,000 and resell it to them for $120,000. The transactional funder is protected because they already know this thing is locked and loaded.

Typically you need nonrefundable earnest money. All the stints have to be through on their side. Much easier if the new buyer’s pay in all cash versus a loan. This is great too, and I really, really like it when new folks are using this technique. They get the deal under contract then they go locate a buyer, and then they use transactional funding. Because this stuff usually costs anywhere from like 2 to 3%. On this deal it would probably be like $2,000 to $3,000. Depending on the area and some other things.

 

The Upside

 

This right here is an awesome option for new folks because it allows you to get into the business without having a ton of risk involved because you’ve already got the new buyer in place, and you’ve already learned all the skills about finding the deal, and then getting rid of the deal. Guess what? In the real world this part’s huge. If you close on a deal with hard money, and you can’t find a buyer six months down the road that’s a real problem. The nice thing about transactional funding, you’ve already got the buyer. These are great options for people that are first getting started, but there’s more.

 

Creative Financing

 

There’s also this thing called creative finance. Creative financing is what I do a lot. Creative finance is using the existing stuff on the property to structure the funding. I use this a lot when I’m taking on deals for long term rentals.

 

Owner Financing

 

The first is owner financing, which I just put a deal like this under contract on Thursday. Owner financing is great. You get the owner to be the bank, so you pay them each month. You can give them an interest rate. A low interest rate, high, up to you. That’s all structured in the negotiation. The seller becomes the bank.

 

Example

 

In the case in the property I put under contract on Thursday, here’s what happened. The person owned the home outright. No loan against the property, so we worked out $93,000 was how much was going be the owner financed loan. I did it at 6%, but that’s because it’ll rent real nice. The total payments like $750. It’s going to rent for maybe $1,200, maybe $1,300 depending. A lot of great stuff on that deal. The value’s awesome. The thing is I didn’t have to go to get a bank loan for it. I was able to use the owner as the bank, but they’ve lived there. They know the home, so they understand a lot of the risks involved in it. It’s a slam dunk.

 

Subject To

 

Another thing you can do is called a subject to, and that’s where you takeover an existing loan. You takeover a bank loan that somebody else got on their home. I get sellers asking me quite a bit, “Why would you take over my loan when you can just go get a new one?” I tell them. I say, “Look, it’s because your loan is a lot lower interest rate than mine would be.” If you go to a bank as an investor they jack up the interest rate, but it’s a lot lower of an interest rate if you buy the home to live in because banks have done their numbers. Those that live in the home, they have a lower default rate than investors do.

 

With a Subject to:

 

  • you’re not actually going to a bank.
  • You’re not going to a hard money lender.
  • You’re not going to a transactional funder.
  • You’re not getting private money.
  • You’re not doing owner financing.
  • You’re literally taking over the existing mortgage.

 

Plenty of Options

 

There are plenty of options, but in most cases the key is a great deal structured correctly, and then your funding options, or your money options open up. I’m just not a big fan of somebody going out there and trying to do deals when they don’t know what they’re doing. Especially if you’re going to lose somebody else’s money. It’s one thing to lose your own money in a bad investment decision. It’s another thing to lose Grandpa’s money.

This goes beyond real estate too. You’ve watched these television shows like Shark Tank where people will spend their life savings. I saw one the other day. He spent like $300,000 to start this business, and then when they get in front of this panel of these sharks they all look at the business, and they say, “I don’t think it’s a winner.” That’s a problem.

 

Know What A Great Deal Looks Like

 

You see, that goes back to the great deal thing I was just talking about in the very beginning. If you have a great deal then there’s a lot of funding that gets thrown at it. It’s so much better to know what a great deal looks like. In this case I used the example of Shark Tank. Know what a great business looks like that’s going to make good money, and have good prospects, and good potential. Better to know that first before you start dumping your entire life savings into.

 

Get Some Education

 

Know what you’re getting yourself into. Educate yourself. Now, if you have to spend some money for education I believe that’s money well spent because that money will be a lot less than the expenses you’ll learn on a bad deal.

  • One real estate deal can cost you a ton of money.
  • Some education, is it going to cost you some money? Sure, but it’s the right kind of expenditure because now you’re getting yourself into a position where you can be wise with the decisions you make, and that really starts with the decision about money.

If you want money for real estate go put together some great deals. How do you do that? Get educated. How to find them, how to structure them, how to get the right paperwork in place. Get that education in you.

You can start off simple. You can start off just putting deal under contract and flipping them, and never using any money like this. You don’t even have to. A lot of the people that we train, and coach, and mentor, that’s what we do. It’s baby steps. We start them with some smaller deals. Make $6,000. Make $10,000. Make $20,000. Not a lot of money before they dive into the bigger stuff, and then eventually you may become this rock star that raises tons of private money.

 

Mobile Home Parks

 

We have one of our students who now does these large mobile home parks. Three million plus, and he raises millions of dollars to buy these things because mobile home parks, a lot of banks won’t lend on the mobile homes. They’ll only lend on the actual land, and they usually only lend about 60 to 70% on the land, so a big chunk of a $3 million mobile home park purchase is actually private money.

This guy just flat out knows his stuff. He’s been through our program. He’s made a lot of money with us. He went on to make a lot of money after working with us. Really knows his stuff. Super dependable. You really can trust this guy, so him raising money is not nearly as difficult. He has a great deal. He can present what the numbers are. He can show his track record. I also feel confident this guy, when he raises that kind of money, is not going to hurt a bunch of other people.

Comments

  1. Are all these types of loans available in all states? I’ve run into that problem in NJ.

  2. Your demeanor and manner of teaching is excellent, and makes it all seem possible.

  3. Phil,

    My Realtor took me to a property yesterday, the ARV= 81k The bank wants 44k, it needs some carpet, paint and an A/C unit.

    This unit was tested positive with “Chinese Drywall”. ???? What?

    Can you please tell me if I have to replace ALL the drywall in this property and if so, about how much would that cost and would you consider this a good deal?

    Thanks
    Sam

  4. Robiel Gutierrez says

    Phil,

    What do I have to do for me to be your student?

  5. Hello, I have a successful (12yrs) private practice and want to purchase the home is live and work in currently. I have great credit and no debt but need a loan that uses something other than tax returns. Do you have any suggestions?

  6. Adam Reesor says

    Hey Phil,

    You are awesome and I just had a couple of questions about the Subject To. I just completed this the other day. I took over a Mortgage and the Deed was signed over to me. House is worth 120-130k and only 93k is left on the loan with a 3.75% Fixed APR. I had the person stop their escrow on their mortgage and I got Landlord insurance on the house. Now since my name is on the Deed will I be the one that gets the property tax papers to pay the taxes? Can I claim the interest on the mortgage even though it is not in my name since I am making the payments? Is there any advice you can give me on this Subject To that I might be missing? Any help or advice you could give me would be great and well appreciated.

    Thank you.
    Adam Reesor

    • Phil Pustejovsky says

      (1) Whomever is the owner of record is required to pay property taxes.
      (2) You can claim the mortgage interest as a business expense for tax purposes.
      (3) The only missing piece is how the landlord insurance policy gets approved by the mortgage company. They will see that the insured is no longer the owner and sometimes they will reject the updated policy and instead, put forced insurance in place which is much more expensive.

  7. Paul White says

    I want to start in rental properties only for now what’s the best approach with funding

  8. Ivonne Romero says

    Do you have a school here in Las Vegas Nevada? I would like to get education to start this business.

    • Freedom Mentor says

      We mentor students all over the United States. Have you considered making application to our Apprentice program?

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