One of the things that has been somewhat of a learning experience over the years has been the art of funding deals. When you start out in the game of investing in income producing properties, and you are completely broke and without financial resources you need to become creative in order to get things funded and we can walk through a few of the ways and ideas that have allowed us to acquire such a strong portfolio in less than 10 years.
I’ll make the assumption that you have done the necessary due diligence on the property and that we are at the stage of making an offer….
The first time you acquire a property, you have the ability to utilize an FHA loan which will allow you to purchase the property with as little as 3% downpayment! Compare that to the 20% downpayment that banks typically require for investment properties and you have yourself a cheap entry point. One thing to consider is that this type of funding is available under the premise that you will be occupying the property. So when we initially moved to Bangor, we were staying in a rental and I came across a 4-unit building that seemed to have solid rental history and the numbers were attractive so we obtained an FHA loan to purchase at only 3% down! Ok let’s be honest, we were not quite sure if we were planning to stay in one of the units, but sometimes its better to ask forgiveness than permission. We still own this property today and have since refinanced at a lower interest rate further improving the cash flow numbers and would never have had the ability to acquire it without the low downpayment option.
Friends & Family
I know I know… Never lend Money to friends or family members, I’ve heard it all before but these are just stories about the times it doesn’t work out. Over the years I’ve had a number of good friends partner on FLIPS or multi-family buildings and each time they made out with significantly higher returns than they would have otherwise. So again, if you find a good deal and the numbers work, be creative and make it worth while for a friend or family member to consider it as an option. In fact I believe it was the second 4-unit we wanted to acquire and again we were still broke and certainly didn’t have 20% Downpayment and now that the FHA option was off the table it was time to use the Friend card since at the time my family was not a good option. They still viewed me as the Punky High school kid that kept skipping school, fortunately I’ve come a long way since then. So I structured an arrangement for this good friend of mine to fund the downpayment and he would take 50% ownership in the property and his downpayment would always remain HIS as well and I would do all the work to manage….he agreed and we purchased our 2nd rental property. This was a one time deal and although I would likely never do that level of upside for a partner, at the time it allowed my to acquire the building with no money of my own and today that building is almost paid off and the most profitable we have and has appreciated significantly.
This has been the silver bullet for me if I were forced to pick a single strategy that has allowed me to acquire beyond my financial means. Owner financing is simply when the current seller acts as the bank and holds a note for a portion or all of the purchase price of the property. Since conventional banks require 20% downpayment and lend 80% of the purchase price, in many cases where that 20% comes from is not typically a huge concern. With that said, be aware that many banks require the buyer to have at least 10% into the deal for them to fund it but that is not always the case. We were evaluating an 11 unit opportunity and my wife and I were a little discouraged since we knew it was a good deal but weren’t sure how we would come up with the $50,000 required for the downpayment so when I asked if the seller would be open to owner financing and he said yes, I went all in… We not only asked for the full 20% downpayment to be owner financed, we also asked for closing costs to be handled and to our surprise he agreed. I still remember leaving the attorney’s offices with a check for pro-rated rents and one of the attorney’s looked at me and said “Not sure I’ve seen someone buy $250,000 in real estate and leave the closing with a check?”. So you don’t know what someone will accept unless you make the offer!
Once you get into the game for a while and begin to build equity in your buildings, you can begin to leverage that equity for further investment and growth. Home equity line of credit can also be a very good source for a downpayment and what’s great is that if you buy right and and a discount which is the idea, you can gain instant equity so that perhaps a nice refinance option could exist 6-12 months after purchase to pay back your HELOC and roll into conventional loan. What’s also great about the HELOC is that you only pay interest on the money outstanding, it’s like you have access to the money if and when you need it but only pay when you grab some.
Funding properties is a critical skill to learn and understand. There are plenty of options for funding, certainly as you become more experienced your funding options will tend to increase since you will have a successful track record. Learn the art of making the deal happen by understanding the needs of the seller, the more you understand their situation, the better chance you have to come to a mutually acceptable arrangement. Playing the game for everyone to win is what will allow you to maintain success long term in any business and this is certainly true in real estate investing.
Until next time… Enjoy and if you took away anything from the post please go ahead and share or comment. I write these for you to learn and enjoy and I write them for me to teach and get better!