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Last Updated: May 14th, 2012 - 22:24:01 |
I just loved that line when Cuba Gooding, Jr. screamed it repeatedly to his agent in a recent Hollywood flick. When I first went hunting for funds with which to do real estate deals, and went knocking on the doors of numerous bankers asking them to "show me the money"... well needless to say they didn¡¯t find it as humorous as I. Furthermore, they all said "No."
When I first started this business I thought you had to have money or at least a credit score in the mid to high 700¡¯s, and I had neither. Since then I have learned a few things about financing creative real estate transactions, and the only thing I learned from the institutional bankers was that they rarely work with guys like me. Don¡¯t misunderstand me here, it does help if you have a bit of cash, but is not a requirement once you find the right sources for money and you learn to buy right. Also, there are banks that loan to our ranks so I¡¯m not saying to ignore them as a source, but stick with the smaller locally based institutions or you¡¯ll be spinning your creative real estate wheels big time. If you are like many of us out there doing deals on a regular basis, you need to understand the process and then find the right mortgage broker, the rest is downhill.
If you have a large nest egg of cash that you want to sink into some deals, or your desire is to buy for long term holding of rentals then this article is not for you. You will most likely be able to find good interest rates on long term money through conventional lenders if you have 10% - 20% for down payment.
Maybe you have great credit and a relationship with your friendly banker and you can arrange for a working line of credit. If so, again this article is not for you. However, if you are like most of the rest of us, and your banker listens to your pitch, takes your business plan to present to the committee and, only after you have left numerous messages, finally returns your call to inform you that "we have found that the business you are engaged in is high risk and we don¡¯t lend in those environments", then a good mortgage broker is your next call and, indeed, a good person to have on your team.
The mortgage brokers you seek are what we refer to as asset-based (or equity-based), often referred to as "hard money" lenders. Generally these guys have access to private money, placed with them with the guarantee of substantial returns. They then broker, resell that money, at a higher interest rate. They make their money both in the upfront fees or commissions as well as the differential between what they pay the private investor and what they charge you. Very simple right? The general parameters here are 1.) they will only do 50-70% loan to value of the after-repaired market value of the property.. . .equity based, get it? And 2.) the interest rate is sky high, probably in the 16.5-18% range.
Whoa! Yep, you read that right, paying 18% on a house purchase will raise anybody¡¯s eyebrows. You have to look at it like any other of the many expenses you face in a rehab project, no greater than the cost of new roof or a central heat and air system. You will be paying interest only during the 6-12 month term of the loan and you may or may not pay a prepayment penalty in the event you are successful in turning the property prior to the end of the term period. Do the math and you will find that on a house that you will sell for $80,000 after fix-up, and you borrowed 65% LTV, your interest payments on an 18% loan will be $780 per month or roughly $30 per day. So $30 is going down the drain every single day you have that sucker I suggest you do not dally! If you are not prepared to work the project quickly this may not be the best route for you to take.
The other consideration is rehab money. If you bought that house right you paid no more than about $42,000 for it. You borrowed $52,000 so you have $10,000 for the cost of rehab. Yes folks, it is possible to do Real Estate deals with none of your own money. Happy Investing!!
Bob White is the founder and president of The White House Adventure, Ltd. Co. which buys approximately 40-50 houses per year, rehabs half of those while flipping the remainder to other investors. He is a seasoned pro with years of full time Real Estate investing experience in Dallas, Tx. Bob is known for his ability to locate motivated sellers in the affordable housing market and turn those opportunities into profit centers. Bob's E-mail: vblanca@swbell.net
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