This question comes up over and over again. Since there is so much misinformation, I thought I should cover the topic in a short article.
My goal is always to fund 100% of the project costs (Purchase + Rehab + Misc Costs) using Other People’s Money OPM.
Why not use your own cash? Because it is a finite amount – it will limit how many projects you can do. Not to mention if you tie up all of your personal cash and then hit a bump in the road, you’ve already exhausted a great back-up resource.
Where can you get this money?
If you have a business, and good credit, you can start opening business lines of credit starting with usually around $40,000-$50,000; which can quickly increase to hundreds of thousands within a year or two.
Let’s assume that is not an option. The first resource is a Hard Money Lender (HML). They will loan based on the After Repair Value of the property and they will loan rehab dollars. Typically, they will not fund 100% of the project. You will often be responsible to cover closing costs; points; a small down payment; and have working capital to start the project.
An investor said to me the other day: “I haven’t found a single HML that doesn’t require some skin-in-the-game…so it’s a lie that you can buy houses with none of your own money.”
I explained that it is not a lie – he only has half the solution. First, not all HML are created equal, so you need to call quite a few and compare their rates and requirements and select the best three you want to use.
Regardless, they will not fund 100%. The difference can come from a Private Lender ( PL). The term PL has been misused over the last few years. It seems that everyone (me included) is promoting some PL list.
The truth is that these are not true PLs. These are private individuals making hard money loans. They are in the real estate lending business. They will loan to whoever meets their criteria. Whereas a true PL in the old school sense, is a private individual who has their money in a low yield vehicle earning in today’s market often less than 1% interest.
You show them how to make real estate loans, secured by real estate, earning them 8-10% interest. They become excited and want to make a loan to you and to you alone. They are not interested in making loans to others. They only want to loan to you and you set the terms. They are your private lender.
So let’s look at an example. Let say that purchase plus rehab totals $130,000. The HML will loan 90% of the purchase and 90% of the rehab, or a total of $117,000. You will still need $13,000, plus points of probably 2.5% ($2925) plus closing costs and other miscellaneous costs of $2-3,000; and working capital to start the rehab. Altogether you need an additional $25-$30,000.
That’s where a PL comes in. That is also why I’m sure to always let PLs know that they can make loans as small as $10,000. If you had two PLs with $15,000 each, you would have this deal 100% funded with OPM.
It is easy to convince PLs because you are offering an interest rate so far above what they are currently earning that it just makes sense. Plus you have the security of the real estate.
A huge opportunity with PLs is when you let them know that they can use their IRA funds to make loans. They think that they cannot touch that money until they retire; and it is earning less that 1%. You can show them that the government allows them to make self directed loans with no immediate tax implications or penalties. This means you are offering them a method to earn 8-10 times what they are currently earning. They will love you for offering them this opportunity.
There are so many creative ways to fund rehabs that you should never have a problem. If you need help with this or growing your business, I am still accepting new private coaching clients. I recently announced a new affordable program to help more people and it is working great.
If you would like real one-on-one mentoring at an extremely affordable price, you need to listen to this video. It will just take a few minutes, but will really change your financial life.
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Expect abundance,
Lou Castillo
