Contrary to popular belief, you don’t need to have a lot cash to get started in real estate. Below are a few options that you can use to fund your deals without any money out of your pocket. (Hint: It’s easier than you think!)
1. Using Private Money / Private loans
A lot of people have money just sitting in the bank. The most interest they earn ranges from 0.5% to 1%. Keep in mind inflation is around 4%. That means that the value of their money is losing about 3% in value each year. Even high yield savings account can’t keep up with inflation.
You can borrow money from these individuals and give them a 12% – 15% return on their money. It’s not as hard as you might think. You just have to know how to present your (real estate) deals to them. Always have a credibility packet that explains how you work on your deals. Be sure you give them enough information so that it answers most of their questions.
So what is exactly is a Private Loan? Simply put, it is a loan made to a real estate investor that is secured by real estate. Private Loan Investors are given a first or second mortgage that secures their legal interest in the property and secures their investment. The keyword here is “secured”; that means their money is secured by an asset, in this case the real estate property.
Let them know that you only buy properties at a maximum loan to value of 75%. For example, if a property is valued at $100,000, the Private Lender will never have to loan more than $75,000 dollars on the property. This is obviously a much safer approach from that taken by conventional lenders. These banks get into trouble because they make loans at an 85%, 90%, or even 100% loan-to-value ratio leaving them no equity for transfer costs, if they are ever forced into a position where they have to take back the collateral property. That gives them enough security on their loan even if you default on your payment.
It’s a win-win for both of you. You give the private money lender a 10% – 12% return on their money backed by a secured real estate property and you make money on your deals without having to shell out money. This is a great way to start your real estate career.
2. Using Seller Financing
A lot of people think 100% seller financing doesn’t exist anymore. But the truth is you just need to know where to look and where to find deals like this.
A good start is to look for motivated sellers that have distressed homes that they want to dispose. Obviously they cannot sell their property to an end buyer because of the condition of their house. If they list it with an agent, they will be in competition with the other more “desirable” houses in move in condition. Because of this their property might be in the market for several months or might not even be sold. On top of that, even if they sell their property after a long period of time, they would have to pay commissions to the agent. A typical commission is around 6%. On a $200,000 dollar home, that is about $12,000 on top of the regular closing cost and escrow cost.
When the seller carries a loan with an investor, the house is rehabbed to be very desirable and in move in condition. The investor then lists the house and sells it quickly. The investor makes a profit, and the owner gets paid quicker without paying any commissions on top. It’s a win-win for both.
3. Leveraging a Business Line of Credit
One of the easiest ways to do 100% financing is by obtaining a business line of credit. A lot of people think they have to have an established company with a good cash flow to be able to obtain a credit line. But nothing can be further from the truth.
Even newly formed companies can obtain a business lines of credit by using their personal credit to qualify provided you know how to look for a company that knows how to get this for you. And the good news is, it won’t affect their personal credit score because the credit lines won’t even appear on your personal credit bureau. It will only show on your company’s credit. This would also give your company credibility and possibly have larger credit lines in the future. And even if you don’t have a good personal credit score, you can always use a credit partner to cosign for your company.
So how do you leverage a business credit line? Simple, find a reputable company that offers a good business line of credit that has no restrictions and can be used for real estate investments and rehab. A typical newly formed business can have up to $75,000 credit line and an established company can get up to $150,000. Even at $75,000, in some states, that is already enough to purchase one property and rehab it. Bear in mind that a business credit line is an unsecured loan meaning it doesn’t require any collateral and is as good as cash.
What if you’re from California or other states with a high price point per property? That is not a problem at all. You can still leverage your credit line in combination of hard money loans.
Most hard money loans require you to put at least 20% down. And almost no one does 100% financing anymore. Maybe if you are a very experienced rehabber, a few hard money lenders will do 100% financing for you, but they will charge you 15% interest plus 3 or 4 points and they will split the profit 50/50 with you since they financed the whole deal.
That can hurt your profits tremendously. With a business line of credit, you can use it as cash to put a 20% down payment with your hard money lender therefore leveraging it so you can obtain 100% financing. And on top of that, you don’t have to split your profit with the hard money lender because you came up with 20% of the loan.
For example, you want to buy a $300,000 property. You can go to a hard money lender and put 20% down which is about $60,000 to purchase the property. Then use the rest of the credit line for rehab. Basically you get to fund a project with 100% financing without any money out of your pocket. And you can replicate this as many times as you want.