The Best Ways to Finance Investment PropertiesReading Time: 7 minutes
Hello again fellow investor,
Let’s get back on track again this week by actually talking about real estate investing! … real estate financing in particular.
There are several different ways to finance the investment properties that you buy. Using the right financing technique in the right situation is critical for the success of your real estate investing career. To explore this issue further, I recently interviewed Wayne Story, an investor who buys 5-6 properties a month and makes an average of $26,100 on each one.
Here’s a picture of Wayne and his wife Linda…
During the interview, I asked Wayne, “What options do real estate investors have for financing their purchases and what are the advantages and disadvantages of each?”
Below is Wayne’s answer. I broke it up into different sections…
Well probably the first one you can use is cash. You can come to the table to buy a property and pay off whatever loan they have. Or in some cases you’re buying properties where there is no mortgage on it. You can just bring cash to the table and pay for it. The biggest disadvantage, of course, to that is you have a lot of cash out and it’s not earning you any other money in any other way, when you could be putting it into other things that actually do earn you money.
Another way is — and this is used frequently when you’re doing rental properties — if you use long term loans where you’re going to buy a property at a real reasonable price, rehab it a little bit and put it into a rental program. The advantage of that is that usually you can get really good interest rates. You can get what today’s 6, 7 percent interest rates, you can do some creative financing by having interest only and things like that and let the equity build on your own. The disadvantage is that you have to use your credit to do so. You have to have at least reasonably good credit. And the other disadvantage many times you’ll find you’ll come up against a wall at how many mortgages they’ll let you have. I’ve seen them frequently say that, we don’t recommend people, individuals, have more then four mortgages at once. There are some ways around that and that’s for a more sophisticated environment than this.
Another area would be where you are partnering with another person who does have cash to buy the house, for instance, buy it outright or provide all the money to buy the property and to rehab it. Usually when you’re partnering with somebody you’re giving a significant percentage, usually it’s a 50/50 split of whatever profits made at the end. So if you’re making $30,000 or $40,000 on a property after your rehab costs, then you’re going to split that and you’re going to get $15,000 or $20,000 and the investor is going to get $15,000 or $20,000. But they’ve provided all the money and they put it up front. The advantage of that is you can get in quick, you can find people that take that kind of thing because they’re going to make a high return on it. It doesn’t take as much, its not as hard a selling deal to be able to sell that kind of a deal. But the disadvantage to that is that you are having to give up so much of your profit.
The next area I would talk about is private money and this is a big part of what we’re going to talk about today. And that’s where you go out and find people in your area or people that you know that have dollars in the bank in any number of different ways and we’ll talk about that in more detail, where they have dollars available in the bank that they can invest with you by being your mortgage company. They actually create a loan for you to buy the property, maybe even create a loan for you to buy the property and do the rehab costs. And then you pay them a higher then regular interest rate they might be able to get through CD’s and things like that.
Another thing you can do is get a rehab loan, which is also known as a hard money loan. These are short-term loans with very high interest rates. They are ideal for buying a property to fix and re-sell. The interest rates typically range from 12 to 18 percent. And they usually charge between 1 and 3 points up front. So as you can see, they are very expensive loans. But these loans aren’t so bad when you consider that you’ll only be holding the property for 3 to 5 months, on average. For investors who haven’t setup their access to private money, these loans are often their only option for fixer upper properties because traditional long-term lenders won’t finance a property that needs a significant amount of repairs.
You can also use, you buy it with owner financing if you’ve got a buyer and that’s part of that 3 options that we tend to use when we’re making an offer to the customer is that they actually do the whole financing themselves. So we may get them to finance it for us at 1 or 2 percent rate above whatever the going interest rate for a mortgage loan is out in the marketplace. Then all we would have to put in is the cost to do the rehab.
Another might be where we buy it subject to the existing mortgage, so we take over their existing mortgage and then we get them to finance whatever equity we’re going to give them. Frequently, probably 1 a month or 2 a month that we get, we can actually get them where we’re taking over the subject to mortgage and we may only give them $1,000 or $2,000 just to get them to move out of the house because all they want is gone and we’re able to take it over and just take over the existing mortgage. So the advantage to that is we don’t have to go out and find financing, we don’t have to go market ourselves to get the financing to get the house. We just get it from them and invest a little money in closing costs and then the rehab costs that we have on a property.
The last would be where you do a lease purchase option, where you’re actually leasing it from them and have the option to purchase it. That’s a little dicey when you get into the rehab part of the business, just because you have to be sure that you’ve got a really tight contract that if you’re going to put any money into it, you make sure that you can actually buy that house. So that becomes a little more dicey. The advantages to that is you don’t have a lot of up front costs except maybe a little bit of purchase option money that you have to put down on the house and some things like you don’t have any closings and things like that to do until you actually sell the property.
But those are the main areas that we see or we use in buying properties.
This excerpt is from a much longer call that Wayne did with me, which was entitled “How To Secure Access To $2 Million In Private Capital Without Banks Even If You Have Bad Credit or No Credit”. He spent the rest of the call talking about private money and how you can gain access to it even if you have little money or bad credit. The good news for you is that you can gain access to this call for free if you sign up for the 30-day free trail at www.MyHouseDeals.com/freetrial. You’ll see that this call is one of the nine free gifts valued at $1,253 that you get for free, just for signing up for a free trial.
This interview is also part of a much larger package called The Vault. The Vault contains in depth interviews with expert investors from across the nation. The Vault covers topics ranging from private money to rehabbing to subject 2 investing to rehabbing to wholesaling and more. Learn how you can get your hands on the Vault at a 36% discount by going to www.myhousedeals.com/thevault.
See you next week. Until then, happy (and profitable) investing!