A key element to being successful in the real estate business is having the ability to fund your deals once you have secured them with a purchase agreement.  If you find tons of deals but have no way to fund and close them you are never going to take advantage of your opportunities.  You would be like a fisherman without a pole.  A golfer without any clubs. 

There are many ways to fund real estate deals.  You can either buy real estate to hold long term in your portfolio or you can quick-turn houses for fast profits.  Whatever you choose to do you are going to have to fund these deals to start the money making process.  There are tons of ways to fund and close real estate purchases.  Here are a few of them:

• - Private Money
• - Hard Money
• - Lines of Credit
• - Banks
• - Partners
• - Credit Cards
• - Your Own Cash
• - Subject-to Financing
• - IRA

Private Money

What is Private Money?  Private Money is considered any money that an individual has pledged they will loan to you for the purpose of financing real estate deals.  Sources of Private Money include friends, family, business contacts, referrals, other investors, and others.  Anyone who has cash in a savings account, checking account, mutual fund, Certificate of Deposit, stocks, IRAs or any other financial instrument could be a potential private lender.  The best sources of private money are older, retired individuals.  Private Lenders are by far the very best source of cash to fund and close real estate deals.  Private lenders will loan money to you based on their trust in you and the collateral that secures their funds which is the property.

Here are the reasons why private money is the preferred method of funding real estate purchases.  You set the rules, you can close quickly, no points, no loan origination fees, no lender fees, no having to prove your income, no credit checks, nothing shows up on your credit report, & it’s cheaper then bring in partners.

Hard Money

What is Hard Money?  There are companies out there who make a business out of loaning money to investors like us.  They recognize the need for investors to have access to cash to fund deals.  Run a GOOGLE search for “Hard money lenders” to find sources of cash or look up the ”Scottsman’s Guide” for sources of hard money.  Go down to your local REIA meeting and talk to other investors.  There’s sure to be a hard money lender in your local REIA group. 

 These companies are similar to private money lenders in a few ways and different in other ways.  Hard money lenders make their own rules, charge points, have prepayment penalties, and normally control rehab payout.  The great thing about hard money loans is that if the property falls within the lending guidelines you are assured of getting a hard money loan.

Lines of Credit

What do I mean by lines of credit?  Lines of credit can be secured or unsecured.  They can be attached as a lien against a property or they can be just an outstanding revolving amount of money like a credit card.  Lines of credit have advantages and disadvantages alike.  Secured lines of credit carry a lower interest rate because the bank has an asset that backs up the line of credit.  The bank views this as a less risky loan because of the collateral the bank has in the property.  Another advantage is that lines of credit can be used, paid off and re-used over and over again.  This gives an investor a lot of flexibility to use and re-use the funds over and over.  Secured lines of credit also usually carry little or no costs. 

Banks

Regular banks are a source for funds to buy properties.  You can walk into any bank on most busy streets and get a regular bank loan if you have perfect credit.  Due to the restraints banks have on lending these days, you must be a perfect candidate to qualify for these loans. 

Partners

The concept of bringing in Partners are pretty simple to understand.  If you do not have the credit, private money, hard money, or cash you probably know someone who does.  If you find a real estate deal that you absolutely cannot pass up and do not have the resources, find someone who does and give them a cut of the profit.  You found the deal and know how to fix it up and sell it for a profit.  Without the financing the deal will not get done.  You need a partner and a partner needs you.  You found the deal.  He has the cash or credit to get it done.  So what’s a reasonable split?  50/50 is the industry norm but deals are done differently all the time.  Just remember to be fair in any deal and remember 50% of something is better then 0% of nothing.

Credit Cards

If you have a credit card, this is probably the easiest source to abuse.  They typically have way too small of an available balance to be of any real use to you.  Even if you have 20-40K available credit on your card what good long term is that going to do for you?  You are going to pay between 10 – 29% interest on those.  You have to make a minimum monthly payment.  You cannot use the cards for more then one property at a time because the available balance is so low.  My advise would be to simply keep the credit cards in your pocket.  If you routinely use credit cards then I would suggest you are simply not working hard enough or being creative enough with finding other sources of financing.

Your Own Cash

Cash is king right?  Absolutely.  Other people’s money (OPM) is even better.  I know investors who routinely use their own cash and their own credit to buy and sell property.  This is fine but the problem I see with what they are doing is that there isn’t an unending source of Cash.  They only have the cash to do one , maybe two deals and then their resources are tapped out. 

My thoughts are these.  If you do the work of raising the funds from other sources you can leave your own money in the bank.  Does having money in the bank give you a sense of peace?  A sense of confidence?  Now what if you go spend all your cash on a rehab and the darn thing isn’t selling.  That would give you a sense of helplessness, a sense of insecurity, a sense of “Oh S%!t”, especially in this volatile market.  Someone is better off having no money because then they are forced to pursue private money, hard money or partners.  Having money makes people lazy.  Do not use your own CASH.  Find other sources.

Subject-To Financing

The concept of buying properties subject-to the existing mortgage is a great way to finance real estate deals.  This is one of the preferred methods of financing long term buy and hold properties.  The concept of subject to basically works like this.  A seller calls and wants to sell their property.  You want to buy it but cannot buy it low enough to buy and quick-turn it for a profit.  By analyzing the loan you realize the loan amount is low when compared to the property valued and also that the mortgage payments are reasonable.  By comparing the mortgage payments to the potential rent payment you may be able to collect you realize there is a positive cash flow each month that could be made.  The next step  is to convince the seller that you’d like to buy their property but that you cannot buy it outright and make money.  What you will do is take over their payments.  The seller agrees.  The seller would then deed the property over to you in the form of a land trust.  A land trust would be created to hold the real estate and the seller would deed the property into the trust.  Now you own the property and all the benefits to that property.  You also have committed to making the payments.  The next step is to find a lease option tenant or a renter to make the payments.  The rent payments cover the mortgage payments plus a monthly positive cash flow.  This is the best and most productive financing strategy to purchase real estate to buy and hold.

IRA

You can get a loan for up to 65% of the purchase price of a property in your IRA using what is called a “non-recourse” loan.  This type of loan is not personally guaranteed by you, it is only secured by the property within your IRA account.  IRAs are a great resource to have and use in real estate.   

Within your IRA, you will have many options for real estate investments.  The most common is purchasing property directly and getting fee simple title.  The title will be held in the name of your IRA, not your personal or business name (with or without leverage or loans).  Another option is buying into ownership of LLC’s or Limited Partnerships that own and operate income property.  Your IRA may also be a lender that holds a mortgage on a property that pays interest to your IRA that is secured by real property.  This is called investing in notes (promissory notes).  In the first two examples, your IRA is the owner of a property, and the last example your IRA is a lender to an owner of the property.  Any of these can be good investments for your retirements funds, all of them have risks and should be only undertaken after careful consideration.  After all, these are your life savings!

Conclusion

There are many options you have to finance real estate deals that there is no excuse to not having the resources to buy and sell tons of houses for crazy profits in the next 12 months.  You should have so much money and so many resources that every deal that comes across your desk should only be a matter of if you like the deal or not.  My most preferred methods are private money, hard money, subject to financing, and lines of credit.  The others sources don’t make investing sense to me and I can’t capitalize like I want with them.  Ask yourself these two questions:  Do the numbers make sense?  How much money can I make on this?  It shouldn’t be a matter of funding.