How to buy real estate with no money
How to buy real estate with no money
How we find the money needed to close real estate transactions
We've talked about finding a deal, but how do you obtain the money to close the deal? If you have extra cash on hand, you may be able to complete the deal yourself, but there are far better options for those looking to do multiple deals or those who don't have the money to close.
Once you start looking for properties and identifying a few potential deals, it's time to start looking for ways to finance them. Below are a few ways we raise the money to buy the properties:
Private investors
Hard money lenders
Banks
Our own money
You can use one or a combination of these. We use all the methods above.
Private Investors
A private investor can be a person who wants to invest in real estate but doesn't have the knowledge or the time to invest. These people usually have other full-time jobs and are looking to get a better return on their investment than the bank. They can also be businesses, such as a fund that gives you money to carry out your deals.
Terms: We structure our deals with investors as an 8-10% return on their loaned money once the property sells or one year after the initial investment.
Hard Money Lenders
Hard money lenders are private companies or people that do loans based on the DEAL. They will loan you the money using the property as collateral if you bring them the deal. Hard money lenders typically charge higher interest rates, but they will work with you as you do a higher volume of deals.
Terms: There are various ways they structure deals. You will usually have an interest payment that you will pay monthly and points on the loan that you will pay upfront. Many of these loans are interest-only* loans in which you pay a balloon payment** on the back end.
Banks
I'm referring to traditional banks like Wells Fargo or Chase. You will usually find the "safest" loans at the best rates from these banks. The only problem is that they base their loan on your qualifications, making it hard to obtain. It is also challenging to work in high volume with these.
Terms: You can expect to obtain a 70-80% loan to value and a 3-5% interest rate with a traditional lender.
Your Money
Your hard-earned money. In my opinion, you want to put a good amount of your own money into your deals (Especially as you start making more and reinvesting). Showing skin in the game is a good sign for your potential investors that you fully believe in your work. The problem with your money is that it is finite. You will run out of money as you try to grow, especially if you're funding deals entirely out of your pocket.
A strategy that works for us is combining our money and private money to purchase the property first, then using hard money lenders to carry out the project. Working this way works exceptionally well with new construction because the front end of the project is less expensive than the back end.
When do you need the funding?
You want to secure the funding before you close on the property. We start allocating capital and securing loans when we get the property under contract and know that we will carry out the project.
Next steps
Once you have secured the money to close the deal, you can finally work on adding value to the property. If you are doing a flip, this means fixing the property. If you are building a new property, this means getting started with the permitting process. Either way, there is work to be done.
Definitions
*Interest-only loan: The borrower pays only the interest on the loan. The principal (which is the actual loan balance) is paid either in a lump sum at a specified date, or in subsequent payments.
**Balloon payment: The lump sum payment that you pay at the end of the loan period to pay off the principal amount.