How To Finance Buy & Hold Deals

Unfortunately, buying real estate and holding it requires money and raising it can be a great challenge. Fortunately, there are multiple methods to overcome such a challenge. However, first it's important to understand the most important principle of buy and hold; thriftiness.

A 2012 Federal Reserve study found the average homeowner had a net worth of $174,500 while the average renter had but $5100. In other words, owning real estate is the key to wealth. And those in that study only needed to own one home. Imagine owning five, or 10 or 20. Indeed, owning real estate has probably been the most effective route to wealth yet discovered.

In the famous Stanford marshmallow experiment, children were given the choice between eating one marshmallow or waiting about 15 minutes with the marshmallow staring them in the face. If they could make it the whole 15 minutes without eating it, they would get two marshmallows. Most kids failed to overcome the temptation. The researchers then kept track of the children and found that those who had waited for the second marshmallow had substantially better life outcomes.

What this shows is the ability to defer gratification is critical for success. Buy and hold real estate investing is the epitome of waiting for the second marshmallow. As I like to put it, buy and hold is the ultimate get rich slow scheme. Most buy and hold investors live substantially below their means for many years before building enough equity and/or enough cash flow to fully enjoy the fruits of their labor. They live below their means in order to grow their means.

But how do you start? The best method is of course, to start out rich. Unfortunately, that’s not an option many have. So below are the best methods to finance buy and hold real estate:

Best Methods To Finance Buy & Hold Real Estate

Save and Hold

Many people with solid jobs that also want to invest simply live below their means and invest on the side. This makes it easier to get bank loans because banks prefer borrowers with W2 income. However, it’s also much more challenging to find good deals with a job, and of course, you are stuck with that job. This is a fairly passive approach to real estate investment, but a good way to get started. After all, you can always quit your job once you’ve become established.

FHA Loans

As an offshoot of the Save and Hold model, FHA loans provide a great boost. You will need a job to get one, but it’s a great start for those looking to transition from a job to real estate investment. FHA will finance 96.5% of the price at very low interest rates for a homeowner occupied property. The great part is that you can finance up to a fourplex. So why not buy a fourplex, live in one unit and rent out the other three?

Flip and Hold

This is probably the safest, most effective way to buy and hold as a full time real estate investor. For investors who are flipping, try to live off the bare minimum and hold every 2nd or 3rd flip. For example, use the profit from the first flip to live off of and the profit from the second flip for the down payment on a property to hold. Then repeat.

Creative Financing

Finding motivated sellers is the key to real estate investment and when a seller is truly motivated there is often an opportunity to get into a property for little to no money down. One possibility is owner financing or a land sales contract. If the seller has some equity, then they can loan you the money to buy their house from them. Or more likely, they can loan a second to you behind a bank loan to cover the down payment.

Another option is to buy the property “subject to the existing financing”. This transfers the deed to you, but leaves the seller on the original mortgage. It will take a motivated seller and plenty rapport to convince a seller to do these types of deals, but they happen all of time.

Private Lenders

Bank loans won't cover the full cost of the property and hard money loans are too expensive for buy and hold. Luckily, there is another way. The method I’ve most often used is to fully finance properties with a trust deed or mortgage from a private lender—usually someone you know or have networked with—at whatever interest rate you can negotiate. We use 9% interest only, but that’s not set in stone.

Now unfortunately, in many markets, properties won’t cash flow at 9%. However, in working class and some middle class areas, especially in Midwestern and Southern markets, as well as smaller towns, they often do.

It is impossible to know who has money. So write an elevator pitch (one paragraph explanation of what you do and offer) and say it to people often. If someone shows interest, invite them to lunch or a casual meeting. Make a business plan and a packet of case studies to show them. We’ve found once people trust you, they are quite willing to swap the 0.2% return they are getting in a CD for the 9% we offer. And if you are buying at the same discounts you would when flipping, you should be able to refinance the whole loan (or at least most of it) with a traditional bank in a year or so after the property has “seasoned” (when the bank will loan based on the appraised value instead of the cash you have into the property).

Partners

Instead of finding several private lenders, you can find one person with deep pockets to partner with. They bring the money, you do the work and you split the equity 50/50. This is one of the most effective ways to buy and hold, although it will usually take a track record in real estate (be it holding or flipping) to convince such a person to partner.

Whichever of the 6 Buy & Hold Financing Methods listed above that you choose – buy and hold real estate investments can grow your wealth exponentially, so getting started is the key.