The big thing I hear typical real estate investors complain about today is that the banks won’t give them enough property. They’re stingy with REOs, they’re holding property back, and worse, they won’t loan, even when they say they will. What’s a real estate investor to do?
Well, for starters, get creative! Don’t consider the banks as a source of money, or even property if they won’t play ball. Here is a list of five ways to finance your properties in today’s market (and these work pretty well any time!):
1. Use the house. If there’s equity in it, see if you can pull the equity out. Perhaps cash back at closing won’t work any longer, but sometimes you can get creative, like using the equity as security against a private loan. If you already own properties with equity, use the equity in one to buy another property. With houses in Atlanta and Cleveland going for $25K-$35K, do you have to buy another house down the street from the ones you’ve got, or can you consider going to a new market where you can turn that equity into a cash purchase?
2. Use the owner. Owner-carry financing is often overlooked or rejected, but it’s one of the first questions I always ask. Why? Because it’s a buyer’s market, and the seller may be in need of next month’s mortgage payment, causing him to be more flexible than the ad you’re answering indicates. Always ask the seller if they are willing to carry all or part of the note.
3. Use hard money. If the deal is good enough, and if you have some cash, consider hard money as a source. However, make sure you are going to flip the deal, AND that you have a back-up. People who end up with hard money loans that they pay on longer than 6 months almost always lose.
4. Use private money. If you don’t have any cash, consider offering a good rate of return to someone you know who’s losing money in the stock market or grumbling about the lousy rates of return the bank is getting. Offering someone 8% when they’re used to getting 3% is very interesting! Just make sure you have an excellent business plan to back up your expectations, and multiple exit strategies so that you can make your payments.
BONUS: Private money lenders are often willing to be flexible, like not taking monthly payments, perhaps in exchange for a slightly higher rate of return.
5. Use the tenants. What was that one? Am I crazy? Well, in higher-end markets, lease option or rent-to-own tenants often have cash to put down, but no credit, especially now due to foreclosure. So if you can get a house under contract for 30 days, you may be able to get a tenant into the property on a rent-to-own basis and give part or all of their down payment to you to the seller. This one works best if you’re doing subject-to deals, or there’s a lot of cash flow after you close on the property. Otherwise, there won’t be enough cash to create the down payment, or you’ll be left without a cushion, which are both reasons not to do the deal.
A word of caution: in this market especially, but in all your dealings, disclose, tell the truth, be forthcoming, did I mention disclose? Make sure the seller knows you’re flipping the deal, the lease option tenant knows you’re not on title, etc. Much of this market is uncharted territory and the laws change daily. So long as you are honest and straightforward, you’ll have happy clients with no excuse to make trouble. Now go buy some houses!
Tom Donnell says:
Halle,
Good information here. Creative Financing is the key for Investors and anyone who is chartering in this field. I have been utilizing the “Lease-option” program for over 4 years in the NM area and has worked out very well for all parties involved. On another note, always be honest and upfront. Have integrity and your business and name will go far.
Tom
October 30th, 2009 at 5:49 pm
David says:
Great info with all the short sales going on many are over looking Lease-options as a way of helping owner and buyers of real estate to get the deal done. Not to mention dollars in the investors pocket for facilitating the deal.
November 2nd, 2009 at 10:13 am
terry reich says:
Thank you for the great information. You make us think which is important
November 2nd, 2009 at 9:44 pm
Frank Van Dyne says:
It is difficult to get bank money for almost anything these days. Single family, duplexes and 4 plexes are too risky especially with the job market the way it is. However, with so many people who have one spouse with a lost job or just got in over their heads on a large home has put many families out looking for a home for a couple of years while things change. Many of these people are good people with good paying jobs but the banks just didn’t want to use the stimulus money to help them and refinance. So these people have good incomes and need a nice place to live. Multi Family housing is the less risky real estate investment my 3 years of research has indicated.
For those investors looking for a great return you have to get creative with you financing and structuring your deal.
I am in the initial phases of an offer on a multi-family apartment complex. Banks are moving slow so I am extending this offer to other investors and private money.
I need $6.1M in investor financing to purchase a property with just under $13M in previous appraised value. Share in 49% of resale equity net value.
Project plan: (in part is as follows)
1. Investor can receive all of the 49% net equity if $6.1M is invested or a percentage of the 49% resale equity net, splitting with the other investors.
2. Five to seven year investment, targeting 5 years, then the property will be resold. The pro-forma projection is indicating a full market value return within 3 to 5 years and the value estimation should be near $14M+/- in years 5 to 7. Estimated for a sole $6.1M investor to be an estimated $3.871M+/-, plus return the of investment dollars. That’s just over a 63% ROI higher should the project run close to 7 years.
3. New concept living programs are planned to increase complex traffic and exposure. No or low cost programs for the complex families who are tight on the budget and for the community. My full range of community programs will bring occupancy close to capacity.
4. Several other special concepts will be put in place to significantly reduce turnover promoting tenant retention.
5. An investor advisory board will be established with the largest investors. Scheduled meetings will be held to update investment progress.
November 5th, 2009 at 11:43 pm