It surprises many beginning real estate investors when I recommend they get started investing without using their own money. They find it hard to believe that sometimes having money can be detrimental to learning to be the best real estate investor you can be.
It's just that I've seen money used as a crutch to make marginal deals go through. I know I've been guilty of getting lazy and throwing money into a deal where a little more imagination and prudent negotiation would have served me better. With an open mind and the right education, no money can be a force to push you to be a faster, more creative, and more skilled investor.
You'd be surprised how fast you can pour your liquid cash reserves into real estate. I've watched traditional investors pour over $1 million into several deals in a matter of months then have to wait until those properties sold before they could free up enough of their money to go out and buy more properties.
You'll never regret learning to buy with no money. It will make you a much more savvy investor for those times you do decide to use your own money or conventional financing.
Money Is Never the Issue When Buying a Property
Many investors think that money (or lack of money) is what stops them from closing a deal. This myth is one of the most limiting things that holds some investors back. Understand that money is never an issue if the deal is right. Say the following words to yourself over and over: If the deal is right, I will find the money!
If there is a deal there you can and will find the funding. The key is that the deal must be right. That means for a cash deal (usually the kind where investors think they haven't got the cash to do the deal) that you need the right price. This means a price at most 70% of the conservative “as is” value less any needed repairs. This means you have to go in at 29.95% to leave yourself room to negotiate if you need to. This kills many deals. That's okay. The ones you want will work out. And you will find a way to fund them.
How Do I Get the Money to Fund the Deals?
Okay, so you've got yourself a signed contract on a great cash deal. Now you need to find the funding. Again, the key is that the deal is conservatively very profitable (i.e. will make you money even if you made a few mistakes estimating repairs, etc.) Here are several sources you can use to make that deal a go:
- Use the seller's existing financing for part of the purchase price. Buying “subject to” you only have to fund the money for the seller's equity!
- Get a cash buyer at 90% of value and do a simultaneous close or flip your deal to the buyer for a cash assignment fee.
- Sell your contract to another investor, again for a cash assignment fee.
- Borrow the money from a private party lender at an interest rate 3-5% higher than a bank CD and secured by a first mortgage.
- Borrow the money from a hard money lender.
- Tap into a home equity or other line of credit.
- Refinance another property to get your down payment and borrow the balance from a lender.
Bring in money partners to fund the deal. (They get depreciation and you control deal. They secure themselves with a first mortgage for the amount they have in, or if they finance it, they can lock in a second mortgage to protect themselves. You agree they get their entire principal back plus 15% before you split any profits from the resale of the property. You split profit 25-50% to them, the rest you.)
I think you get the idea here. The key is that if the deal is right, you will find the money. Never lose sight of that. The only two reasons why this wouldn't be the case are fear and ignorance.