The Untapped Resource You’ve Always Wanted
Don’t Be Fooled by What You Think You Know
You must be an efficient manager for your properties if you’re going to be a successful investor, but equally important, you need to secure a trusted source of financing.
Less money down equals more deals, more equity, more net worth, and more cash flow.
If you are just starting out in the investment world, the first source of financing you may think of is conventional, bank finance. That’s what you’ve secured for your primary residence, and it might be all you know. Especially if you’re new to this field. Conventional financing has perks, but not always for investing.
While institutional lenders are picky about the borrower and the property, private money lenders look primarily at the appraised value, the equity in the property, and the exit strategy.
“Good credit not required” really does work with private money lending.
All conventional banks are going to underwrite you as a borrower. Private money lenders underwrite the deal for the collateral or the security.
People have asked me, “Lee, why in the world would anybody ever come to you to borrow money? Why wouldn’t they just go to the bank?” Well, the reality is those that can go to banks and borrow money should. If you need to borrow capital and you have great credit, strong nuances, good tax returns, and all of the things that banks love to see, you should get as much bank money as you can get.
The problem, however, is that banks have limits. Most banks can only lend up to four loans to any individual borrower. If it’s a Fanny or a Freddie Mac backed loan, the max is going to be ten loans. Just know that there is a ceiling. What most conventional investors do when they hit the ceiling is they stop buying. That’s the worst thing you can do. Hit the ceiling, max out your available lines of credit and your available loan opportunities from banks and then go to a private lender. First take full advantage of cheap capital and get as much of it as you can, and when that op on is exhausted, and a private lender.
Let me explain the difference between conventional and private money.
As you know, bank financing typically requires a down payment based on the appraised value of the home or the purchase price, whichever is lower. This doesn’t give you an advantage when buying a distressed home, and they’re not going to loan you money for repairs. All that additional cost will come out of pocket. This means that your investment into the real estate transaction is the down payment (up to 20%), the closing costs, and the bill for repairs.
**Let’s say you have a property for purchase at $55,000 that needs $20,000 in repairs to have an ARV (after repair value) of $100,000.**
Low-interest rate, long-term financing.
If you can go with a bank to finance your investment property, you’ll benefit from low-interest rates and long-term financing. It all depends on the deal you’re assembling and what you plan to do with it.
They require an inspections.
If the house needs $20,000 in repairs, the bank is not going to loan out the money until the repairs are done. You can go to the owners and request they do this for you, which isn’t likely going to happen. And if you’re buying the property as a foreclosure, that’s definitely not going to happen. Also, banks won’t allow double closes or assignments, so when you get a deal from a wholesaler or flipper wanting to assign the property to you, the bank isn’t going to allow it. This excludes many potential deals.
Now, let’s say you can get over all of this.
Here’s the worst disadvantage for turning to a conventional loan for a distressed property; it can take 30-60 days to close.
When you’re buying these properties from motivated sellers or from banks that want to get rid of the asset, time will kill the deal. A motivated seller will take a lower offer if you can assure them the property will close in, say, ten days.
Bottom line for this example; if you’re able to secure a bank loan for a distressed property, you’re looking at a 55% ROI. Not bad.
Now, let’s talk about private money, which comes from a private source specifically for real estate investors.
In contrast to a bank loan, these loans have a higher interest rate and a shorter-term loan, as they are designed specifically for short-term investments. A private money lender knows the property could be in rough, distressed shape, and that’s okay. The cost of the repairs can be covered in the loan, which means no out of pocket from you for the rehab of the property.
The biggest advantage–contrasting of course with the long process of a bank loan–is that a private money lender will close on the property in as little as a few days.
This strengthens your offer, giving you an advantage over other interested parties who have bank financing.
Private money lenders will loan based on the ARV and not based on the purchase price. The lower you buy the property for, the less you’ll bring to the table. Less money down gives you the opportunity to do more deals, which is more opportunity for profit.
If you turn to a Private Money Loan for this example, your ROI jumps from 55% to 200%. Which would you choose?
Each finance option serves a purpose, but if you’re investing (and especially if you’re flipping), get a fast quote from CogoCapital.com. For more, check out: Cogo Capital _ Private Money For For Real Estate Investors
Also, if you have properties that have significant equity in them and you know for a fact that you cannot leverage or borrow any more money against them, you should consider selling them because the equity is tied up. It’s trapped and it does you no good just sitting there.
As an example: If you have a piece of property that has $50,000 or more in equity and you know for a fact that you can’t get a line of credit against it, there’s nothing you can do about that. What you should seriously consider doing is putting that property up for sale, doing a 1031 exchange, and now using a hundred percent of that equity as down payment into a larger, higher- income producing asset class, like a duplex, triplex, four-plex, commercial building, or car wash, and just keep rolling that money.
Equity is like the worst investment ever. You can’t spend equity. When you come to me at an event and say, “Hey, Lee, I’ve got a pre y powerful real estate portfolio. I’ve got a million dollars in equity,” my advice to you is sell every single one of those properties that make up that million and take all of the cash from those sales and go buy a larger piece of property with higher incomes and higher cash loads. In doing so, you get the full value and benefit of the entire million dollars from a standpoint of leverage. The 1031 exchange allows you to put all of the proceeds from the sale towards the down payment of the larger asset. It’s a much better strategy than just sitting on all that equity.
To Your Success;
Lee A. Arnold
The Lee Arnold System of Real Estate Investing
Interested in learning more about Real Estate Investing but don’t know where to start?
Have you gone to FundingTour.com yet? Find an event near you to dive into a crash course of real estate investing AND get the funding you need to start your first project. See what people are saying about our Funding Tours by clicking the link HERE