Alright, here's the bad news. Forget about what the GURUs told you about how you don't need cash or credit to do this business. Although buying sub2 is essentially buying with owner financing, sometimes these houses will need payments brought current or minor to major repair. This takes cash. There WILL be times when you will need cash or credit or a combination of the two. Don't get me wrong, you CAN do some deals without either but if you are thinking about holding property without having at least the ability to get cash if needed, I just have one word for you…DON'T!
Holding property without the means to take care of the unexpected is foolish and extremely risky. Since we want to be successful real estate investors, we don't want to be foolish or risky. If your bank account is sitting at -0- and a tenant doesn't pay, what happens then? What if they move out and trash the place, who pays to repair it? In GURU world, tenants always pay and never skip out. In my world, and yes, yours too, it happens more often than you would like to think. Be ready for it.
Here are a few things to do to have money ready when you need it.
When I first got started I was fortunate enough to have both a little cash and great credit. While you don't need both, it does help to have one or the other. I knew I wanted to leave my job ASAP and I also know that as soon as I was unemployed, the banks might not look as favorable on me. Knowing that the banks might not lend me money while unemployed, I started sending in every pre-approved application that came in the mail. I soon had over 300k available to me in cash advances that I could use to make up payments or buy and rehab properties. While I have never had to use this source to actually buy property, it was nice knowing it was there if I did need it.
As most major credit cards allow you to get cash advances or write checks to access the credit limit, it can be a source of fast cash. The fees to do this are usually small and certainly less than the typical points, survey, title insurance and appraisal costs of banks which you won't have using this method. In addition, once you have several cards, you will be bombarded with cash access checks with promotional 0% interest rates for 6 to 12 months. I once knew a lady investor who would actually buy junker houses with cash access checks at 0% interest rates and rehab them. If they hadn't sold by the time the promotional rate was up, she would just do a balance transfer to another card and another 0% interest card. She bought dozens of houses with no finance charge! Pretty creative, huh?
Bank or Other Institutional Financing
If you already have a relationship with a bank, you may be able to get a credit line. These come in two flavors, secured and unsecured. Secured credit lines typically are secured by the real estate you buy with them. They may be good for one year and have to be renewed at that time meaning that the bank can call them due at renewal time in they want. The unsecured works like a checkbook. The bank gives you a credit limit and a checkbook and you can spend as you wish. These lines are great for down payments or to bring payments current on a pre-foreclosure or to make repairs to property or for whatever else you may need. Getting a sizable one is generally difficult and something that you have to establish yourself with the bank before they will consider it.
Friends & Relatives
These can be sources of borrowed money but I would only consider it as a last resort. Nothing wrecks relationships faster than not being able to pay back a personal loan. Give them a little time and let them start to see you making cash and doing well before you approach them. They might even approach you first!
While I have never used partners, most every other investor I know has. Partners can be anyone from other investors who have the cash to help you fund arrears or fix-up in exchange for a share of cash flow or backend profit to folks who have no interest in real estate investing who are just looking for a return on their money. Be sure if you do use partners to spell out very clearly exactly who has what job in the agreement.
Hard Money/Private Money
Look for private individuals who make loans on real estate. You can find them through your local real estate club or research at the courthouse for individuals who are making private loans on real estate. Hard money lenders are usually equity based lenders meaning that they are lending purely on the value of the property not on your credit score. They generally loan up to 70% of value at higher than bank rates, usually 12 to 18%. This is just a general guide as some of them may lend less and some more. Some may want to check your credit and some may not. Most will only lend as a first mortgage but a few (like mine) will lend me cash for a second mortgage which comes in handy on sub2 deals where there are arrears or that need repairs. These are good lenders to have as you will need cash from time to time to bring loans current so you can take over payments. Get to know a couple of these lenders if you can. They are just people like you and me who have cash that they want to get a good return on.
I met my primary private lender when I called him on a home he was trying to sell. We chatted a few times, developed a rapport and he agreed to lease option it to me. I paid him like clockwork every month for two years and when the tenant/buyers finally cashed me out, I asked him what he was going to do with the cash. I proposed him lending to me to buy real estate on the short term and we agreed at 8%. It is much better than CDs for him, much better than hard money for me. Truly win/win. Now when I need money for a cash deal I call him up, drive out and have a cup of coffee with him and leave with a check. No appraisals, fees, credit applications, balance sheets or hoops to jump through.
Don't get me wrong, there are deals out there that you can buy sub2 that will not need cash to close the deal. Pretty houses where you have buyers ready to go into them, even fixer's in nice neighborhoods if you have a ready buyer may not need any cash from you, however, you are going to be missing many, many opportunities by not having a source for cash WHEN you need it.
This week, for example, I bought a pre-foreclosure sub2. This house is a 3/2 on 1 acre in a great suburban area of our town and will sell fast. It needs very little in repair (maybe $1500) and it is all cosmetic. The owners are divorcing and had abandoned the house. They have owned the house for 10 years and it has a 7% VA loan in place with payments of $640 PITI. They owe 76k on this house worth 115k and they gave it to me for the loan balance but I had to make up the 7k in arrears. Had I not had access to the cash to do this, I would have had to pass on this deal.
Take the time to line up sources for cash. There really are many sources out there and you don't have to have perfect credit to use them. Once you have these sources in place, you will find many more potential deals in your area.