By Raymond K Lemire
You’ve made the decision to invest in Real Estate and are
going through the process of building your team. However, one thing keeps
jumping out at you – your bank account doesn’t have enough cash to fund the
$125,000 you estimate you need to buy, rehab and hold an investment property
you have your eyes on.
Just like the majority of other Real Estate Investors, you
need to find a source of funds to complete your deals.
What you need to do is to sit down and think like a lender.
If you were lending someone money to invest in real estate, what would you be
looking for? Remember, you are putting your hard-earned funds at risk if the
person you are lending to doesn’t get the job done. Hence, you will want to
look at the situation very carefully before agreeing to be their lender. What
are your biggest areas of concern? Before reading further, think of at least
three questions you would want your borrower to answer.
Banks and private lenders go through the same practice.
Their goal is to generate a return on their capital while minimizing their
risk. You need to prove to your lender that the investment you are asking them
to fund is virtually risk-free. The riskier the venture, the higher the cost of
Lenders look at the six C’s of Credit:
1. Character – or perceived integrity of the borrower and their level of experience
2. Capacity – what is the borrower’s ability to repay the loan (cash flow from other sources)
3. Credit – FICO score, payment history
4. Capital – personal net worth and funds you have in the deal
5. Collateral – lender safety – what percent of the project are they funding
6. Conditions – economic conditions, location of project, exit strategy and loan purpose
Each lender will look at the above list differently. They
may be a bank which has strict standards imposed on them from Fannie Mae or
Freddie Mac. Or if your sister is the lender she may be easier or tougher on
items 1 and 5.
The point is that you need to conform to the lender’s needs.
Don’t expect to be able to talk your way into a loan if you aren’t satisfying
the lender’s requirements. Different lenders have different requirements. You
need to find which lender you have your best fit with.
Here is a list of funding sources (certainly not exhaustive,
just a starting point). Consider what their various needs are:
1. Banks - Large national banks - Smaller regional banks
2. Hard Money Lenders - Very experienced with dealing with real estate deals
3. Private Lenders - Private individuals willing to lend on real estate
4. Seller Financing - Seller may be willing to be paid over a longer period of time
5. Secured Line of Credit - Personal line of credit or equity line on your personal residence aka 2nd mortgage
6. Unsecured Line of Credit - If you have a job, some banks are willing to give you an unsecured line of credit
7. Credit Cards - If you have good credit you are probably receiving offers for cheap cash from your card company.
8. Purchase a property “Subject to” the existing mortgage.
Consider the following scenario. You have found a property
you would like to keep as a long-term rental. Purchase price is $65,000 and it
will require $30,000 in rehab. The ARV (after repair value) will be $150,000.
Here are a few funding choices. Different people will prefer
different options. And this isn’t a definitive list.
1. Get a Rehab loan from a bank which will convert to long-term funding once a tenant is in place. - You need to put up 25% of the purchase price ($16,000) plus the closing costs of approximately $5,000. The bank will fund 100% of the rehab costs. - So you need $21,000 plus at least $10,000 of the rehab costs as the bank funds after work has been done.
2. Seller Financing. Seller has agreed to receiving payment of $1,000 per month for 65 months. - You need $5,000 closing costs – probably more as most likely you are paying the seller’s closing costs as well. - Plus you need the full $30,000 in rehab. - Of you give up some of the deal to a partner who funds the necessary $35,000+.
3. Private or Hard Money Lender willing to lend you $100,000 (or less). - After you have a tenant in place, you find a bank which is willing to waive the seasoning requirements and lends at 75% of the ARV. A total of $112,500. Giving you enough to pay back the lender plus interest and the bank fees required to write the loan. - Why would the lender do this deal?
4. You put up part of the required funds from any of the above scenarios from your personal line of credit or from advances on credit cards. Only you can determine the level of risk you are willing to carry.
Want to hear more ideas on how to fund Real Estate
Investments? Attend one of our General Membership Meetings. Your first meeting