No Out-Of-Pocket Cash
The most successful real estate investors are the ones who have conquered the art of creative financing. They seldom if ever use their own out-of-pocket cash. One of the best methods of creative financing is finding private lenders. This is funding that comes from a private source such as friends or family members. It could be a business acquaintance, or a professional such as your physician, accountant, or attorney.
If you are in a position where you have no capital and perhaps a less-than-stellar credit rating, it may be difficult for you to believe that people are out there ready to hand money over to you, but it’s true. They are out there and they would very much like to hear from you.
Private lenders are people who have money in low-return investments such as an IRA’s, CDs, or perhaps even low-yield mutual funds. If you come to such a person with a strong deal which could net them a higher percentage than they are now getting – and receive it quicker – most will say yes. And furthermore, they will say yes repeatedly. This means you can borrow 100% of your purchase price including the repair costs and closing costs. You need never use your own capital.
Create the Deal First
Those who are new to real estate investing think they need the money before negotiating a deal. However, the opposite will be true in this case. What better way to convince a private lender than to have a deal right in your hands.
The details your investor will need to know are such items as:
• Anticipated sale price of property
• Purchase price
• Total repair costs
• Total holding costs
• Selling costs
• Total loan amount
• Loan to value
• Profit potential
The more information you can present, the better the private lender can make an informed decision. Having the information in hand also means you can present it to more than one lender. In other words, you can “shop” your deal. If this is your first deal, it’s best to begin with lesser amounts. Once you earn the lender’s trust, you can then advance to the higher priced deals.
When you find a willing private lender, make sure that the money is readily available. There’s nothing worse than coming down to the closing day and find that he or she needs two or three more days to get the money in hand.
How Much To Pay?
The standard going rate for such funding is around 15% and some will charge points as well. Loan to value (LTV) will range between 65% and 75%.
Some of your loans will be for a very short time – a few days perhaps. Others may stretch into two or three years. It is usually the older lenders who are patient and would rather see their money multiplying over a longer period of time.
Finding Your Lenders
If you have difficulty finding an individual who fits these qualifications, try an ad in your local newspaper seeking private money. Detail how much is needed and the approximate return. You may be surprised at the responses you receive.
In addition to newspaper ads, ask real estate agents, title or escrow officers, and even other investors in your area. There are people with money “for hire” who would love to have a client like you who would repeatedly borrow funds. If their money is sitting idle, they are not happy!
After your reputation becomes more secure, you will have a number of private lenders who will work with you on most any deal. In fact, once you win their trust, they may not even need to see the details of the transaction. All they want to know is how much you need and for how long.
Once you begin to think creatively about financing your deals, you will have more leeway to make offers on bargain properties that would be impossible to transact with conventional lending sources. That’s pretty exciting.