The Book on Investing in Real Estate With No (And Low) Money Down
The Book on Investing in Real Estate With No (And Low) Money Down

The Book on Investing in Real Estate With No (And Low) Money Down

However, if I were to purchase that same house for $60,000 because I took the extra steps necessary to get a great deal, which of us is in the better position? The traditional investor, who has $30,000 of their cash tied up in their property and no real equity, or me, who has nothing invested but owes less? (Location 383)

Remember my definition of creative finance: the ability to trade cash for creativity. Notice there is a trade-off involved—one you need to accept. Most of the methods I’ve discovered for acquiring real estate creatively weren’t found in books. (Location 403)

The point is: be conservative, buy great deals, and have a financial backup plan. If this means spending six months working a second job to save up $5,000 to put into a savings account, then start that second job tomorrow. Maybe it means asking your boss for a raise or lowering your living expenses (remember… sacrifice!). Whatever you need to do, get started as soon as possible. Stop wasting time on excuses and start planning for how you are going to get there. (Location 432)

Real estate investing and the strategies for creative finance are heavily defined by location. Does this mean the strategies outlined will not work for your area? Not necessarily. You may be able to tweak a specific strategy to work wonders in your area. The point is to open your mind, learn what works in other markets, and train yourself to think creatively and apply those strategies to your own local market. (Location 485)

Obviously, investing in an owner-occupied single-family home is more about appreciation in value than cash flow, and because I’m a cash flow investor, I am pretty strongly in favor of the multifamily idea. (Location 602)

One of the subsets of the FHA loan is called a 203k loan, so named because it’s based on section 203(k) of the National Housing Act from the Department of Housing and Urban Development (we’ll stick with calling it the 203k loan). (Location 699)

At its core, the 203k loan is a two-part loan that includes funds to both purchase and rehab a home to the specifics you desire. (Location 704)

The 203k loan allows you to avoid the competition for already beautiful homes and instead focus on properties that most other homebuyers are too afraid to consider. (Location 721)

The difference lies in the extent of the rehab involved. The 203k streamline loan can be used for smaller cosmetic problems, like painting, carpet, and odor removal, while the regular 203k loan can be used for structural changes, like moving walls or building additions. Contractors that work on the property rehab must be FHA approved. However, most licensed/bonded contractors can become FHA approved by simply submitting the correct paperwork to the bank, and your mortgage professional can help them do this. (Location 760)

Besides trying to manage contractors and deal with the drama that accompanies any rehab, you’ll have recognize the possibility that something could go wrong on the project that would require more money than you had anticipated spending, and HUD won’t cover those items. (Location 778)

Just as the VA loan is only for veterans, the USDA loan has a strict qualifier as well: rural single-family homes only, for low- to moderate-income homebuyers. But what exactly is “rural” and what qualifies as “low to moderate income”? You might actually be surprised, and chances are good that you could qualify for a USDA loan if you live outside a major city by any small distance—you don’t need to live 500 miles into the desert or deep in the Midwest farmland. (Location 832)

Obtaining a 0 percent down payment loan requires leveraging yourself to an exceptionally high degree, which could be a negative for some. We’ve talked about this already, but leverage is not necessarily a bad thing if the deal is good enough. (Location 853)

Bob wants to be cool, but for any number of reasons, he does not have the time or the inclination to do the research and to make the deals. (Location 947)

Knowledge. Your personal brand is developed through knowledge. I’m sure you know someone in your life who talks a big game but clearly doesn’t know what they are talking about half the time. (Admit it, you are thinking about someone right now.) People can smell “that guy” coming from a mile away. (Location 988)

The other side of the “branding coin” is your product. It has to be good, and it has to be worth selling. Nabisco did not become the monster company it is because Oreos tasted bad. No, Oreos are probably the best-tasting treat ever invented on planet Earth. (Feel free to disagree, but deep down, we both know I’m right!). (Location 1001)

A home equity line of credit, or HELOC, is similar to a home equity loan, but the amount of money you borrow (determined by the amount of equity you have in your home) is not necessarily dispersed at the start of the loan. (Location 1250)

The real world, however, is a much darker place. In reality, trying to get financing from a bank is often like trying to shave Chuck Norris’s beard while he sleeps. It’s just not going to happen (because he doesn’t sleep). (Location 1475)

If hard money is a new concept to you, you are probably reading the interest rates in that list, thinking there must be some kind of typo. After all, compared to typical bank financing, hard money is ridiculously expensive! So why would anyone use it? (Location 1492)

Often, house flippers will use hard money to buy a property, fix it up, and resell it. When this approach works, it works well. The lender may charge 4 points (4 percent of the loan) and a 12 percent interest rate, but if that is figured into the total cost of the project, this number is just part of the price of doing business. (Location 1505)

but first, what about individuals investing in rental properties? Let’s explore how buy-and-hold investors can use hard money to invest in real estate with little or no money down. (Location 1535)

Buy-and-hold investors can definitely take advantage of certain strategies for using hard money in the right situations. This brings me to the story of my first flip, which accidentally taught me how to use hard money for a rental property. Let me explain… (Location 1546)

I was able to obtain an 80 percent LTV mortgage on the property, which was enough to pay the hard money lender off in full. In the end, I ended up with a 4 percent, 30-year fixed loan, stable tenants, a beautiful house, and absolutely no money out of pocket. (Location 1565)

Keep in mind that most banks will require at least six months (sometimes up to a year) of “seasoning” before they will allow a refinance to take place. In other words, even if you complete the repairs in two weeks, you will be stuck paying the high rates to the hard money lender for at least six months, but probably an entire year. (Location 1568)

Most hard money lenders want to see “skin in the game.” In other words, they want to see that the borrower has some vested interest in the property’s success. They (Location 1585)

However, 100 percent financing can still happen with the right deal. Remember, hard money lending has very few hard and fast rules, so everything is up for negotiation between the borrower and the lender. (Location 1587)

A hard money lender wants to know that, no matter what, they are going to make money and win. If I had sold the house, the lender would have received all their money back and had a successful investment. (Location 1591)

In general, most hard money lenders have a certain LTV they will lend on, which is usually between 50 and 70 percent of the after-repair value (ARV). (Location 1595)

For example, if you can get a hard money lender to fund $50,000 of a $60,000 purchase, and you need an additional $10,000 for repairs, you are going to be short by about $20,000. (Location 1609)

hard money can be risky because of the high costs (both the one-time and monthly fees) and short timeframes associated with the loan. (Location 1616)

For the purpose of this book, I consider hard money lenders to be individuals who lend money as part of their business and charge higher rates and fees than a private lender might. (Location 1696)

around. A recent study showed that 22 percent of American workers have at least $100,000 in their retirement fund.20 With 154 million workers in America,21 that means more than 30 million Americans have more than (Location 1724)

The same effort you put into networking in the real world can be applied online by teaching what you know. You don’t need to be an expert to start a blog and share your story, but if you know how to communicate well online, a blog can be a great way to build up trust and gain a reputation. (Location 1751)

A simple answer like “I run an investment company that focuses on purchasing, renovating, and renting out homes for monthly cash flow, and I work with a lot of different partners to make it all happen” can initiate a whole conversation on the topic if the person is interested. If not? No harm, no foul. If they want to know more, they’ll ask. (Location 1787)

An important note: I don’t recommend using these “elevator pitch” conversations to explain your whole private money lending process. As I said earlier, this is like dating. You probably don’t jump into marriage right after asking someone out, and you probably shouldn’t be making serious commitments at a networking event while you’re surrounded by all the lights, sounds, and distractions. (Location 1800)

For this reason, having a continuous pipeline of deals coming in is key so your private lender doesn’t have to wait too long for an opportunity. Asking the lender to commit with their wallet as soon as possible is also wise. In other words, the sooner they have money invested in the deal, the less chance they will walk away. (Location 1853)

Typically, I will locate a great potential real estate opportunity and present it to my private lenders, explaining the deal in detail. I don’t utilize a fund, but instead I treat each deal separately and utilize certain lenders for each specific deal. (Location 1873)

Each property we purchase is secured by a note and deed of trust, which gives the lenders the right to foreclose if I don’t fulfill my end of the relationship. Typically, I never borrow more than 70 percent of the total after-repair value, which gives the lenders a significant cushion against default. They are secured both by the deal and through the proper legal channels. (Location 1877)

Through consistent networking, I come across a lot of individuals looking for a secure place to diversify their portfolio. Whether it’s online in the BiggerPockets Forums or in the real world at a local real estate club, people with money are everywhere. My goal is to simply offer advice and tell my story, and the money usually finds me. (Location 1885)

I use private money in three different ways: I borrow it in the form of a private money loan (Loan); Blind Pool Funds (Blind Pool); and in identified asset funds (One Off). Both Blind Pools and One Off deals are considered a “fund,” but in the case of a Blind Pool, the money goes into a pot, and I buy whatever I want with it, as long as the parameters of the deal match the fund objective. (Location 1910)

In the case of Loans, the source of funds is truly a lender, and the security they receive is a first deed of trust on a single property. (Location 1917)

In the case of the Blind Pool and One Off, those investors are not lenders, they are limited partners, and they receive no security other than an ownership interest in the entity. The entity will own all of the acquired assets, so there is real estate behind their investment, but no direct security, as there is in the case of a Loan. (Location 1919)

For a Loan, my ownership entity—either a Limited Partnership (LP) or Limited Liability Company (LLC)—is the borrower, but no entity is formed for the purpose of the loan. (Location 1924)

In the case of a Loan, they write a check or wire money to the title company, and when escrow closes, we receive the funds. (Location 1930)

Deal structure is the one thing that most new investors seem to get hung up on, but deal structure is simple compared to recruitment. That said, they are directly related to one another. If your deal terms don’t match the appetite of your audience, the project won’t get off the ground. (Location 1938)

We have raised over $2 million in private lending from average people, not lending institutions or savvy investors. (Location 1956)

The lenders receive a note and mortgage for security on the loan. We also give the investors an insurance certificate made out to them so they know they are also protected with insurance in case of a total loss. (Location 1959)

When someone shows interest in investing, we mail them a professional packet explaining who we are and what we do. If they are local, we suggest they come and spend a little time with us, touring some of our current projects. At the end of that tour, we ask them, “Are you ready to invest with us?” (Location 1963)

Each month, we send them a statement to show what their investment is accruing. At the end of the term, when we sell the house and close, we wire the principal and interest back to the investor, and we look for the next deal. (Location 1972)

We pay from 8–14 percent annually. However, we only pay for the months we use the funds; if the money is not invested but is sitting in our account waiting to be used, no return is given yet. (Location 1977)

A few problems we’ve encountered are having to sell a house for less than expected, or holding it much longer than anticipated and having to bring money to the table in order to pay the investor. (Location 1984)

We also attend a lot of events—self-directed IRA events, for example—and strive to teach people about raising money. Teaching people your business model and how you raise capital is actually a great way to raise money. Raising capital for charity is another great way to mingle with the accredited. Another great way is to join CEO and networking groups. (Location 2004)

In other words, our investor’s capital is collateralized by the assets of the LLC that’s tied to the offering (i.e., they own shares of the company). (Location 2014)

They submit their subscription agreement and fund their involvement with certified check or wire. We pay our investors a flat return every month, whether the money is in use or not. We utilize capital from the fund to pursue deals as they come up. (Location 2026)

We once had an unforeseen expense, when we had to hire our securities attorney to review the investor content on our website in reference to our fund. To avoid this, be careful with the content you make available online for investors, especially if you have a private offering. (Location 2033)

If you are just starting out, it would be wise to steer clear of the “general solicitation” game and just avoid publicly advertising that you are raising money. Once you get more experienced, you can jump into that game. Instead, raise money by allowing people to come to you, as we’ve discussed. If you network and let people know what you do, they will come to you if they want to invest. We’ve already covered this extensively—it’s all about building relationships. (Location 2051)

However, ethical wholesaling is not about stealing anything. Again, it’s about solving problems and helping people by handling something that they don’t want to or can’t handle themselves. If someone doesn’t want to sell, you are not going to make them do so. You are simply providing a way to solve their problem, if they consider your proposed solution the best option. Remember to be smart—and ethical. (Location 2841)

deal. A syndication is a business where you are selling shares of ownership. And anytime you start dealing with the buying or selling of shares in a business, the U.S. Government gets involved. Very involved. Enter the Securities and Exchange Commission (SEC). (Location 3735)

An accredited investor is someone who the government has deemed rich enough to invest in a risky real estate deal. (Location 3743)