The Inside Guide to Funding Real Estate Investments: How to Get the Money You Need for the Property You Want
240
The Inside Guide to Funding Real Estate Investments: How to Get the Money You Need for the Property You Want
240eBookFirst Edition (First Edition)
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Overview
Great financing is the holy grail of real estate--with the power to make or break the deal. Learn how to get the money you need for the property you need.
Whether you are brokering your first deal or your fiftieth, finding the right financing for that specific situation can be the most important challenge you face. However, you can find nearly unlimited supplies of funding for all your real estate deals if you know where to look
The Inside Guide to Funding Real Estate Investments introduces you to the range of options available--from traditional mortgages and asset-based loans to crowdfunding and private money--and provides an inside look into the loan process as a whole and how lenders think through different scenarios. Learn all there is to know about:
- What lenders are looking for
- How to close with confidence
- How to maintain sufficient liquidity
- How to protect your credit position for future deals
- What to do when deals go south
Whether you’re planning to fix and flip or buy and hold, you can rest confidently that you are in prime position to not only avoid costly borrowing mistakes but also be set up for real estate success beyond what you thought possible with The Inside Guide to Funding Real Estate Investments by your side.
Product Details
| ISBN-13: | 9780814438862 |
|---|---|
| Publisher: | AMACOM |
| Publication date: | 11/16/2017 |
| Sold by: | HarperCollins Publishing |
| Format: | eBook |
| Pages: | 240 |
| File size: | 656 KB |
About the Author
Read an Excerpt
CHAPTER 1
THE BIG PICTURE OF REAL ESTATE INVESTING
For many, the concept of "real estate investor" conjures up images of a skyscraper-owning mega-developer. For others, the image of real estate investor comes from those so-called reality shows about house flipping, where tens of thousands of dollars are made in a few short simple weeks of renovations. Neither of these offer an accurate representation of the real-world investor: The reality is a mash-up of people from all backgrounds, levels of experience, and income.
The Vehicle and Strategy
People get started in real estate investing typically because they have a desire to make money and create a lifestyle — and it can be done with great results. Real estate investors come in all varieties: Yes, there are skyscraper developers and there are house flippers making fortunes, but there are also average landlords cashing rent checks every month. There are mom-and-pop house flippers and there are real estate wholesalers crafting deals to pass along to other investors. The things that distinguish them from each other are the investment vehicle and the exit strategy used to realize profits and create a lifestyle. It's important to know that aspiring investors don't need to have deep pockets or prior experience to invest in real estate. Certainly education and caution are warranted, but the barriers to entry may not be as challenging as many people think.
So, what makes an investor choose one investment vehicle or exit strategy over another? For the most part, it's any of three things: time, money, or skills. These three important factors impact not only the investment vehicle, but also the strategy.
Three Common Real Estate Investment Exit Strategies
1. Wholesaling. A wholesaler specializes in finding great deals on properties and passing those deals along to investor buyers for a fee. The buyer of wholesale properties is usually a fix and flip or buy and hold investor. Many people are exposed to wholesalers on a regular basis but don't realize it. When you see a WE BUY HOUSES sign, you are probably seeing the marketing efforts of a local wholesaler. The wholesaler acts as a middleman and earns a fee for finding the seller (i.e., the property), negotiating the deal, and executing the contract. Once wholesalers have a property under contract, they find a capable investor buyer and use an assignment clause to transfer the right to purchase the property to the investor, who then fixes and flips it or keeps it as an income property.
2. Fixing and Flipping. Flippers, as they are often called, bring a distressed property up to market standards and resell it for profit. Fix and flip investors need to find great deals on properties that can be renovated and resold in a relatively short turnaround time. Flippers often rely on local wholesalers to locate properties with good profit potential.
3. Buy and Hold. Probably the most familiar investment strategy is buy and hold — commonly known as "landlording." Landlords purchase property for the express purpose of holding it to generate passive rental income and the potential for long-term gains through market appreciation.
With each of these strategies come unique needs in terms of time, money, and skills (see Table 1-1).
For anyone involved in real estate investing, it is helpful to consider the end goal as you approach each opportunity. Questions to ask include:
• How do the properties you are looking at fit into the big picture?
• What do you want the property to do for you in terms of short- or long-term gain?
• How does the property fit with your capacity to invest your time, money, and skills?
If you have a lot of money but not a lot of time, a buy and hold strategy could be your thing. If you have more time than money, wholesaling could be the ideal gig for you. It pays to really take a close look at the personal commitment that the different investing strategies require and determine if a strategy fits your ideals.
More About Exit Strategies
Having clear exit strategies is critical for any investor in any niche. Every property should have a Plan A to take it toward profitability. Understanding how to apply strategies that target short-, mid-, and long-term goals will help to make determining your exits even easier. Experienced investors in all asset classes know that you have no business getting into an investment unless you've got a clear path out.
Consider the End Before Beginning
So what's the endgame you can consider right now, given your level of time, money, and skills?
For a buy and hold strategy, questions to ask include:
What's your monthly income going to look like?
How will you fund the acquisition of the property?
How long will you keep the property and why?
What will you do with the proceeds when you decide to sell?
For fixing and flipping, you need access to funds to get you where you want to go. If you don't have a clear exit strategy that demonstrates expected returns and timelines for repayment, don't expect an easy road to funding. Questions to consider:
How long until you can cash out?
What's the cost of your funding?
What's your expected profit?
What will you do with the proceeds?
Is this something you want to do again and again?
If you are wholesaling only:
How much in wholesale fees would you like to earn?
How many marketing leads do you need to make enough offers to close enough deals?
What market will you target?
What will you do with the money you make, and are you willing to wash, rinse, and repeat to keep the fees coming in?
A Path to Success
It's not uncommon for those new to real estate investing to start as a wholesaler and then progress toward both flipping and owning income properties. Wholesalers don't need cash to get started, but they do need to develop certain skills. As a successful wholesaler, you learn how to find great deals, assess property repairs and values, and negotiate contracts. These skills readily transfer to fix and flip investing. The smart wholesaler can learn the game and use earnings from wholesale fees to actively buy, fix, and flip properties for even more gain than is realized by wholesaling. Then, profits from fix and flip properties can provide lump sums to purchase rental properties that generate income more passively. Over time, the investor's time, money, and skills develop, allowing for the use of higher net profit strategies.
Chapter 18, "How to Land the Best Loans for Your Deals," covers the types of funding and loan features that can best facilitate your exit strategy and big-picture plan. Each investor and asset class has different needs when accessing capital for investment properties and projects. The next chapter more broadly covers the types of funding options available to investors.
TAKEAWAYS
* Revisit Table 1-1's money, skills, and time requirements. When you think about these needs, which strategy will work for you right now, and why?
* Which strategy would you like to use five years from now, and how do you plan to get there?
CHAPTER 2
AN OVERVIEW OF FUNDING OPTIONS
Since the 2000s, real estate investment funding along with traditional mortgage lending have gone through significant changes. During the bubble years early in the decade, money for purchasing real estate was readily available. Lenders loosened up loan qualification criteria for homeowners and investors alike, and the end result was too many bad mortgages. This impacted the entire real estate market, and ultimately capital for purchasing real estate became difficult if not impossible to secure.
Fast-forward to the recovery of the real estate market and you find that the lending landscape has improved along with the market. The real estate investor who had been shut out of most borrowing opportunities now finds the capital for investment property purchases more readily available. Lenders realized that there is a huge appetite for funding investment properties. With the market flush with opportunities to purchase foreclosures and other types of distressed properties, lenders have responded by securing and loaning capital specifically for real estate investment.
Here, I want to introduce the four primary sources of funding for investment properties. In upcoming chapters, each is covered in more detail.
Traditional Mortgage Lending
This type of loan is familiar to most of us — it's the conventional mortgage underwritten to government Fannie Mae and Freddie Mac guidelines, most often used by homeowners. The loans are offered by banks and mortgage brokers. When financing an owner-occupied home, the traditional loan is the go-to source for purchase monies. During the bubble years, it was even possible for investors to source funds through traditional lenders. Of course, that all changed with the 2008 market crash. The fallout from that event is still felt by investors, who continue to be challenged by traditional lenders' underwriting criteria for down payments and loan-to-value and debt-to-income ratios, along with their reluctance to finance properties in need of significant repairs. Combine that with the extended time it takes to close a traditional loan and the result is a borrowing climate that often cannot meet the needs of real estate investors. Despite the challenges of securing traditional funding, it is still possible on rental-income-producing properties for the investor with verifiable income, great credit, and a big down payment to meet the rigors of underwriting.
Asset-Based Loans
Asset-based lenders for real estate investment are also known as hard money lenders. The term "hard money" is derived from the fact that the loan is secured by a hard asset; however, some people joke that hard money is "easy money with hard terms." It is easier to qualify for hard money loans, but it comes at a cost. Higher interest rates and shorter terms are the norm, and for many fix and flip investors in particular, the cost is justified by the profit potential. There are caveats, however, and those interested in hard money should pay careful attention to Chapters 12 and 13, which focus on hard money lenders and their terms. Some investors use hard money to acquire and renovate properties, and then seek traditional long-term funding to finance the property for rental purposes.
Private Money Loans
It's possible to borrow money for investment properties from private individuals. Private money loans are typically secured the same way as traditional and hard money loans. The property is used as collateral and repayment terms are outlined in legally executed loan documents. Private money has the distinct advantage of being the most flexible of all sources of funding. Whereas banks and hard money lenders set the rates and terms, when working with a private money lender, there's opportunity for negotiating rates and terms. Finding the individuals who can and will loan money for real estate is a process of relationship building, but once established, private money can be a go-to source for fast and flexible funding for both short- and long-term loans.
Crowdfunding
It is now possible for real estate investors to secure funding for real estate deals through crowdfunding. There are multiple ways to secure funding from "the crowd," with the property, the project, and the numbers dictating the best strategy. All crowdfunded property investments are listed and administered by third parties. They make the investment offering public through their web portal and manage all aspects of the financials and legal requirements. More often than not, crowdfunded properties are larger commercial projects like apartment buildings, shopping centers, and new developments that can benefit from financial repositioning of debt and equity. The market for crowdfunding smaller projects like fix and flip single-family homes is still in its infancy. If you are thinking of crowdfunding your deal, check out Chapter 7 for more about the use of crowdfunding to finance properties. It's also possible to invest in other people's properties via online crowdfunding portals. While you don't become a partner or owner in the property, you have the option to invest in debt or equity positions.
Chapter 8, "The New Kid on the Block: Crowdfunding," covers this option in more detail.
Funding for real estate investing is readily available — and not all borrowers need to have A+ credit and big down payments. Hard and private money make it possible to jumpstart a new real estate investor or keep the seasoned investor supplied with capital for properties and projects.
* TAKEAWAYS
* What did you discover about alternative types of funding that has the potential to boost your real estate investing capacity?
* How can you combine your "time, money, and skills" profile (Table 1-1) with alternative sources of funding to jumpstart your real estate investing activities?
CHAPTER 3
AN INTRODUCTION TO ASSET-BASED LOANS
Is Asset-Based Lending What You Need?
Asset-based lending is expanding rapidly and real estate investors are now able to tap into this nearly unlimited supply of funding for their real estate deals. Funding can be secured through local lenders; even more convenient for today's investor, it can be done online with the click of a few buttons.
For anyone involved in real estate, it is very important to understand what asset-based lending is and how to find quality asset-based real estate lenders. Asset-based lending is a broad term that usually describes lending that is specifically used for business purposes. At its very core, asset-based lending is a business loan that is secured by some sort of asset as collateral. Assets can include a real property, business inventory, accounts receivable, or other balance sheet assets.
So, when something of value is pledged as collateral, it's an asset-based loan. But we're not talking about a traditional homeowner's loan that uses the home as collateral. We're talking about asset-based lending for real estate investing, which has its own set of rules, purposes, sources, and pluses and minuses. The most common types of asset-based loans for real estate investing are hard money loans and private money loans.
Hard money is readily available to investors, is typically offered by companies or private lenders, and comes with strict guidelines for everything from project plans to draws for paying contractors to repayment terms (usually very short).
Private money loans are issued by individuals and can be much more flexible, but you have to know who to ask. It can take months, even years, to develop a network of private money lenders to work with. Whether you use hard or private money loans, building a strong working relationship is the key to being able to go back for more project funding.
Real estate investors find asset-based lending attractive because loans are based on the property or project, rather than the personal credit history or cash position of the borrower. Instead, lenders look at the numbers and the exit strategy and anticipated return for the investor. They look at the as-is value of the property and the after-repair value of the property if it is a fix and flip. They look for safety in the numbers of the deal rather than debt-to-income ratios and credit scores of the borrower (as covered in great detail in other sections).
These loans work great for real estate investors since many are self-employed; some may have existing mortgages that exclude them from traditional bank financing that limits the number of loans an individual can secure. And for those new to investing, asset-based lenders offer funding options that a traditional lender might not. So, unlike the homeowner who has to prove income, existing debts, and a whole lot more, an investor looking for asset-based funding needs to document the viability of the property and its intended use and anticipated outcome.
There's been an explosion of asset-based lenders in recent years because there's a huge demand for investor financing. You know what they say — money follows opportunity, and lenders woke up to the fact that real estate investors have been cut out of the traditional lending model and there has been pent-up demand for funding real estate deals.
There's a yin and yang to everything, so here's what to be aware of when considering using asset-based loans, including hard money and private money loans.
(Continues…)
Excerpted from "The Inside Guide to Funding Real Estate Investments"
by .
Copyright © 2018 Ross Hamilton.
Excerpted by permission of AMACOM.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Foreword, xv,
Introduction, xvii,
1. The Big Picture of Real Estate Investing, 1,
2. An Overview of Funding Options, 9,
3. An Introduction to Asset-Based Loans, 13,
4. An Introduction to Hard Money Lenders, 17,
5. What You Need to Know About Private Money Lenders, 21,
6. How to Take the Mystery Out of Private Money, 29,
7. Thinking of Crowdfunding Your Deal?, 35,
8. The New Kid on the Block: Crowdfunding, 41,
9. Partnering to Get the Funds You Need, 47,
10. Using Banks to Fund Real Estate Investments, 53,
11. How to Find Asset-Based Lenders, 61,
12. Inside the Mind of Asset-Based Lenders, 65,
13. Asset-Based Lenders: A Peek at Their Cards, 71,
14. Dealing with Down Payments, 75,
15. The Dirty Truth About Some Real Estate Lenders, 79,
16. Hard Money Lender Scams and How to Avoid Them, 85,
17. How to Successfully Get Funded as a New Investor, 89,
18. How to Land the Best Loans for Your Deals, 93,
19. Is Your Baby Ugly?, 99,
20. Estimating Your Project's Costs, 107,
21. The Time Value of Money, 117,
22. What Every Investor Needs to Know About Terms, Cash Flow, and Formulas, 121,
23. The Hole Poker: The Devil's Advocate, 129,
24. Next! Know When to Walk Away from a Real Estate Deal, 135,
25. Dealing with Detours, 139,
26. What Comes First? The Deal or the Dollars?, 141,
27. Preparing to Get Your Loan Funded, 147,
28. Who to Take with You, 153,
29. Estimating Your Time of Arrival: How Long Does It Take to Fund and Close a Real Estate Deal? And What Can Real Estate Investors Do to Streamline the Process?, 157,
30. Avoiding Costly Borrowing Mistakes, 163,
31. Investment Property Loans: Everything Is Negotiable, Right?, 171,
32. How to Choose the Best Funding and Investment Property Lender to Meet Your Needs, 177,
33. High-Performance Property Financing: Understanding the Mechanics of Your Loan, 181,
34. Fix and Flip Strategies to Get Your Investment Property Sold, 187,
35. Buy and Hold Real Estate Investment, 195,
36. Keep Fueling the Journey, 201,
37. When Your Lender Takes the Exit, 207,
38. When Your Rehab Goes South: What You Can Do When Your Rehab Takes a Wrong Turn, 211,
39. What If You Can't Make Good on Your Investment Property Loan?, 217,
40. When the Wheels Come Off Your Real Estate Investment Venture, 223,
Index, 227,
About the Author, 235,
Sample Chapter from The Real Estate Investor's Pocket Calculator, 2nd Edition by Michael C. Thomsett, 236,
About AMACOM, 251,