When a person considers getting into Real Estate Investing, especially Rental Properties, as opposed to flipping - one of the first questions (if the thought is not dismissed before even asking it) is "Where do I get the money?". And unfortunately, most people don't even ask the question. They just make the blanket statement that "I don't have the money" or "I can't afford it" - whether it be out-loud, to someone else or just in their head.
In the book Rich Dad Poor Dad, Robert Kiyosaki mentions that his Rich Dad taught him that poor and middle class people often think in terms of "I can't afford it". While the Rich unleash the most powerful force available to man to solve a problem (their brain) by asking the question "How can I afford it" - thereby presenting a problem to their brain that it must now work to solve. Whereas just saying "I can't afford it" required no further thought on the matter. Your done, game over.
There's a way just about everyone can afford to invest in Real Estate. It may take some time and work, but are you just going to dismiss the thought or ask yourself the question and put your mind to work on a solution?
So today's Podcast is asking the question "How can I afford it". Where To Get The Money to invest in Real Estate!
Welcome to Ep. #15 - Where To Get The Money? Using Other Peoples Money (OPM) For Real Estate Investing Success
"If you can't afford to pay cash, you can't afford it." - We've all heard these types of life lessons. I'm a Dave Ramsey listener, and he often advises that Real Estate should only be purchased with ALL CASH.
When I decided to get into Real Estate I had all these thoughts in my head and I had access to approximately $100,000. I could have listened to Dave Ramsey and others who are against any and all forms of debt - and bought one property. Maybe by my second or third year I'd have been up to 2. But instead, I used that $100,000 that was available to me to buy 4 properties within about a year and a half - and still had money left over.
I did this by using Bank loans to get 75% to 80% funding, leaving me to come up with the other 20% to 25% plus closing costs - out of my $100,000. I further funded the rehab of each property using a combination of personal funds and zero percent interest credit card promotions spanning 12 to 18 months (more on using credit cards later).
Now for the debt adverse person who follows the teachings of Dave Ramsey, this certainly sounds insane. And Robert Kiyosaki, his books speak of something he calls Financial IQ, with IQ being a measure of your ability to figure out and solve problems and Financial IQ being a measure of your ability to solve financial or money problems.
And so not to be harsh, but if you have a low Financial IQ and are not willing to do anything to increase it (I suspect you wouldn't be listening to this Podcast if that were you) - but if so, then you should do exactly as Dave Ramsey teaches and avoid all forms of debt and buy everything (including Real Estate) only with 100% cash. Putting money to work for yourself (especially other peoples money) requires a higher Financial IQ.
Now don't get me wrong… Dave Ramsey and his like teach great information (that's why I listen to them) as it relates to MOST things. But they are just flat out WRONG when it comes to Real Estate. And its easily demonstrable that they're wrong.
I shortened the intro to this podcast, as the original was too long, but listen to Episode #1 and I also used the long version in Episode #12 - where it goes on to state the many benefits of Real Estate Investing… Where someone else (the Bank) provided 80% or more of the money. And someone else (the Tenant) pays all the bills.
Real Estate is the only asset that I'm aware of where you can purchase for 20 cents on the dollar, with the other 80 cents being loaned to you at what is currently all-time low interest rates that we have today (and really for more than the last decade), that can be paid back (by your Tenants) over 30 years. You're not even the one who pays back the loan! And over those 30 years, you get positive monthly cash-flow in your pocket month after month, and the asset increases in value on average year over year. Plus you get many different tax benefits of owning the asset.
Why you would let fear of debt prevent you from getting all those benefits is just completely beyond me - so we need to understand that there is a such thing as GOOD debt… Its not all bad. Good debt puts money into your pocket, bad debt takes money out. Good debt increases your wealth, bad debt makes you poorer. Good debt (including the interest) is paid back by someone else, bad debt is paid back by you.
And with this debt, better still, as time goes on and inflation takes place, you are paying back (or actually your tenants are paying back) the money you borrowed today with dollars worth less and less over time. Imagine you borrowed $100,000 (30 years ago), back in 1989 to buy a house worth $125,000 back then. The $100,000 you borrowed back then was able to buy a lot more than that same $100,000 could buy today.
As proof, Search Google for the price of gas in 1989, and you'll see that it had just reached $1.00 per gallon. Here in North Carolina the current price of gas is like $2.55 per gallon 30 years later. So what this means is that you are paying back your loan with progressively weaker dollars than you borrowed, as those dollar buy MUCH LESS today, than they did 30 years ago. Compare the cost of food. I just went to Red Lobster (I love my seasfood) and their Ultimate Feast is now like $29.99; but when I moved to North Carolina back in 1996, it was only $19.99 - for the exact same thing. How much do you think the price of gas and food and everything else will have increased over the next 30 years?
So now I know I'm off topic here going into so much detail on debt (good versus bad) instead of WHERE to get the money, but I'm going into all this to make sure we're on the same page - that borrowing money to buy Real Estate is a GOOD use of debt. Because really, if you disagree with that, then you can stop listening, as you are certain to disagree with all of my suggestions as to where to get the money to invest in Real Estate. Because I'm going to tell you to borrow money (from a variety of sources) so that you can buy today and lock in the buying power of the dollar, but then pay back with weaker dollars from your tenants over as much as 30 years.
Because if you take out a 30 year loan TODAY, and YOUR TENANTS pay it back over the following 30 years, it is almost certain you'll be borrowing much stronger dollars than those being paid back over time. Jason Hartman (a long time Investor and Podcast host with over 1,200 episodes to his credit) calls this "Inflation Induced Debt Destruction".
In other words, inflation works towards your benefit over time, destroying your debt. He even argues that with today's low rates and the many other benefits of owning Rental Real Estate, that you are actually being PAID to borrow the money. So listen to Dave Ramsey if you want to, while I (and others who believe as I do), get rich borrowing money to buy Real Estate at all-time low rates - that is not even paid back by me (my tenants pay it back on my behalf), while I create monthly positive cash-flow and pay no taxes, because of all the tax benefits that Real Estate provides.
So of course I would consider it a financial crime to NOT leverage the benefit of what is essentially FREE MONEY to acquire a cash-flow producing asset that will likely increase in value, and provide tax benefits (why do you think Trump doesn't pay taxes on billions made - he owns Real Estate… don't get mad, get in the game! You can do that also) - it may not be a skyscraper or hotel, but a single family home or two, duplex, triplex or quad will lower (if not eliminate) your Federal and State Taxes. Then if you have a W2 job, everything taken out of your check for taxes is coming back to you - or you can lower your withholding and instantly create a raise for yourself - just by buying a rental property or two. And of course, the more you get, the greater the effect. Especially if you're following the BRRRR method that I detailed in last week's Episode #14, which is Buy, Rehab, Rent, Refinance, Repeat. Because everything you spend on the rehab is a tax deduction.
So this was all just a long-winded way of saying that the all cash (no debt) method of handling finances just does not apply to Real Estate. In fact, with Real Estate its just the opposite. Your returns are maximized by using leverage, which is just another way of saying to use borrowed funds to create a cash-flow producing asset for yourself. So hopefully with any objections to using debt to invest in Real Estate overcome, let's get back to the original question… "Where to get the money." - Hint… It involves using debt.
So Plan-A of "Where to get the money" is always the Bank. That's how I got my first few properties and it works great getting 75% to 80% of your funds from a conventional lender (or Bank), but this assumes you have the other 20% to 25%, plus closing costs, and any needed rehab expense and whatever reserves on hand the Bank wants you to be able to show. It also assumes you have a decent credit. As the bank is likely to want to see a 680 or higher credit score. And if you're 720 or 740 or above, even better to get the best rates. And if you have some credit challenges, I'll be doing a coming episode on how to solve that problem as well.
The Bank method certainly works great if you can continually come up with your share and other portions, but eventually (if you want to keep growing your portfolio), you'll need to move on to other methods of funding your purchases. And even if coming up with your portion is no problem for you, you can only get a certain number of conventional loans (potentially per person if you're a married couple) - before your tapped out of the conventional loan options. I've heard this can be up to 10 or as few as 4 per person at various times - but I'm not sure what the current limit is.
So once that happens (if not before), you have no choice but to pursue other methods. For me, especially since I use the BRRRR method that I discussed last weeks Episode #14 (where extensive rehab may be needed) - my Plan-B (with the Bank being Plan A) was a Harm Money Lender.
A Hard Money Lender offers funding of 75% to as much as 100% of the purchase price for a property, and then up to 100% of the rehab cost as well. But its NOT cheap! Interest rates may be double what you'd pay at a Bank, and points (pre-paid interest) is also likely to be high in the realm of 2 to 4 points (sometimes even higher). This means you could easily end up paying 12% to 16% (or more) for the money, but for the right project it may certainly be worth it.
I believe I paid 11% and 3 points on my first Hard Money Loan, so I was at 14% combined. Now this came down bit by bit upon each subsequent project and now I'm at about 9.5% total on my Hard Money Loans. And the more that I put down, the better rate I get, so I often end up putting down 20%, sometimes even 25% - to get the lowest rate. And while I hate the idea of points, in this scenario I'm often working with a broker, and the points are how he gets paid. Knowing that, the points become less painful when I know that he has gotten me decent funding on multiple projects - including a new build project I'll talk about in a coming episode.
But now, Hard Money Lenders (just like Banks) want you to maintain some level of reserves. And closing costs are often inflated on top of the higher rates and points. They may also have minimum credit score requirements. So you may ask why anyone would want to use a Hard Money Lender. Well, it has to be on the right project. One that has the potential for sufficient profit to make it all worth it. But the main benefit is that a Hard Money lender will lend on a project (providing 100% of the rehab funding) that a Bank would never touch.
Banks want the home to be in near livable condition (only needs new paint, flooring and appliances maybe at most). But a Hard Money Lender will lend on properties with foundation issues and fire damage and so much more. I've gotten funding from a Hard Money Lender where two different Banks had previously refused to lend to other potential buyers of the home, so I got it at a great price - due to the upper level floor being near to collapsing into the lower level at a spot, making the home unsafe to inhabit at the time of purchase (something Banks don't like).
Further, Hard Money Lenders not only tend to be expensive, but it is always short-term funding, so you may have as little as 6 months to repay the loan in full. However, I personally would not accept a loan with a term of less than 13 months. This provides sufficient time to finish the project and refinance into conventional long-term funding after having owned (called seasoning) the property for the sometimes required 12 months to be able to then refinance at 75% of the new appraised value. All of my largest rehab projects were funded by Hard Money Lenders.
And as professional rehab lenders, it's not a bad idea to work with a Hard Money Lender - as its a second set of critical eyes to make sure that your investing in what will become a profitable deal for you. As your experience grows and you take on more complex projects, it's also not a bad idea to have multiple Hard Money Lenders on your team to compete for your business. Just note that even with that, the cost will still be higher than working with a Bank, but they will also open up the door for projects with increased profit potential. But you'll likely still need to have reserves and put some amount (like 20% to 25% of the purchase price). But I'm sure you're thinking that I don't have the 20% down, so Banks and Hard Money lenders are out!
So we've got Banks and Hard Money Lenders covered so far, but both may require you to put 20% or 25% down, plus cover closing costs and show reserves - while having a certain credit score. Now when I started that was not a problem for me, as I mentioned having access to $100,000 and I had pretty good credit. You may therefore think you do not have access to the 20% down or reserves… But you may.
Do you have an existing home with equity present? Maybe you can get a home equity loan (or even better) line of credit. I've used a HELOC multiple times to cover my down payment and/or reserve requirement. Do you have an IRA or 401K? My wife has the military version of a 401K called a TSP for Thrift Savings Plan. Twice I've used her TSP to provide the 20% down because Banks require sourcing of funds, and it was easier to make a TSP withdrawal as the source of the down payment funds, and then pay back that loan with my business funds - then to try to source the business funds directly. Banks won't typically allow down payment funds to come from a business if making a purchase in your personal name, so if you have an alternate source of funding that you can use until the transaction closes, that makes things much easier if you're self-employed and have non-W2 income like me.
And I know when you think OPM (Other Peoples Money) that you are most likely thinking Private Lenders. And sure, that is certainly where we want to get as Real Estate Investors - where we have a number of Private Lenders who stand ready to fund our details (100% purchase and rehab) with low or lower interest rates. But with the possible exception of close friends and family, it is unlikely that a Private Lender will give you a dime until you have a proven track records. I had completed several deals prior to getting my first Private Lender funding in place. Just know that OPM means ANY money leveraged to take down a deal from any source. Banks, Hard Money Lenders, HELOC, IRA/401K/TSP, and even cash value life insurance and credit cards are all forms of Other Peoples Money.
The thing you must get out of your head is that being a Real Estate Investor requires YOU to have money. It Doesn't! You see, if you want to buy $100,000 of previous metals, such as Gold, you need to have $100,000. No one is going to loan you any money to buy Gold. If you want to buy $100,000 in Stocks (unless you already own a sufficient amount of stocks that you can margin / barrow against), you need to have $100,000. No one is going to loan you any money to buy stocks unless you already own a great amount in stocks. But Real Estate is the only asset (like I said before) where you can borrow 80 cents for every dollar. So you can buy that $100,000 house with $20,000 ($25,000 counting typical costs). And I think we can all agree that it's a lot easier to figure out how to come up with $20,000 or $25,000 than it is to get $100,000. And nothing says your first house has to be that expensive. My first rental property was about $61,000 and I had to come up with $18,000 to take it down.
And I hear you - "well I don't have $18,000"… Well I didn't either when I first started talking about owning Rental Properties and being a Landlord like 20 years ago. But how are you ever going to have it - 1, 2, 3, 5 or even 10 years from now, if you do not start planning for it and taking action to that end - NOW? Hopefully you won't waste something like 15 years thinking about it like I did before I finally decided to take action. But at least I wasn't sitting around doing nothing all those years. I was already self-employed and was building my Web Hosting business, ViUX Systems, which you can find online at ViUX.com. But I wish that I had gotten started with Real Estate Investing sooner.
Now before I move on to focus on Private Lenders, let me say a bit on using credit cards for Real Estate Investing. Its risky… It dangerous… So don't just jump right out there and try this method. You need to have a HIGH Financial IQ to make it work. I have every major card you can think of, and my balance sits at ZERO for most of them, most of the time. But that fact causes them to send me 0% promotional offers all the time, in an effort to get me to use the card. Many times, it is completely FREE MONEY for 12 or even 18 months. I've had some offers go 24 or 36 months occasionally.
But sometimes there is an upfront "Convenience Fee" of 3% or maybe 5%. But even with that… 3% or 5% is not a lot to pay for access to large sums of money that are then being put to work to earn 30% or even 50% or more on a project. And since I often have to show cash reserves on-hand when working with Banks and Hard Money Lenders, using money from credit cards allows my money to remain idle in my accounts as reserves. I've even taken money from a card at 3% and then loaned it out at 12% to another investor. Why not make 9% on OPM? This is putting Other Peoples Money to work for you by profiting on the arbitrage between rates. Its what Banks do every day. It is what Hard Money Lenders do.
But of course Dave Ramsey is going to tell you to RUN AWAY from this idea and anyone suggesting it. And I would tell you the same if you don't now what you're doing and don't have the Financial IQ to pull it off. I would also tell you its stupid to jump out of a plane, but I'm likely to go skydiving at some point in my life with a professional as my guide who does it successfully every day.
If you're not over extending yourself and have the money to pay it off, then using credit cards to partially fund your projects and rehabs can be a way of increasing your profits and accelerating your Real Estate Investing growth. Further, as you complete each deal and pay off the cards, your limits will increase, interest rates will reduce (but sometimes only upon request) and the promotional offers will become better. Using your cards can have a short-term hit on your credit score as you are carrying larger balances that are near to or at your limit for that card; however, in the long-term the benefit should be overall positive to your score as your overall limits increase and percentages of utilization decreases as you move into using other forms of OPM, like Private Lenders.
One additional benefit of using credit cards (especially if you have a business like I do) is to run all your household and business expenses through one or more points credit cards. I put just about everything on my AMEX card, and I stack points each month. As a result, most of my travel is completely FREE (paid for with points). I'll eventually do a show just on this topic, called Credit Card Hacking.
OK, I've got much more to say on this topic of Where to get the money, but due to length, I'm actually going to end this episode here, and make this Part 1 of 2. I'll continue in Part 2 next week starting with and focusing on where you really want to get as a Real Estate Investor, and that's having your deals 100% funded by a network of Private Lenders. That's when you'll often get the best terms, lowest rates, low to no points and funding of 100% of both the purchase price and your rehab budget.
Real Estate Investing really becomes fun when you have Private Lenders, but it is also when you REALLY need to know exactly what you're doing, as now you have someone's hard earn money directly on the line. You don't want to be the person who loses someone's life savings - so in the next show (Part 2) - I'll not only speak about how to find and work with Private Lenders, but how to protect their money from loss and create a situation where you're doing deal after deal with the same lenders over and over again - as you make money for your investors and build a rental empire for yourself.
What are your thoughts on money? How do you feel about debt? Are you a person who thinks in terms of "I can't" or "how can I"? The difference between rich and poor (or middle class) may very well exist in the distinction between those two mindsets.
Most people would LOVE to be a Real Estate Investor. I've yet to meet the person who says they would NOT want to own Real Estate. I've met people that would rather not be a Landlord, but everyone wants to own Real Estate. But most people will dismiss this thought as something they can't do by saying "I don't have the money" or "I can't afford it".
That's disappointing - because if instead such people would ask "HOW can I get the money" or "HOW can I afford it" - they would be unleashing the power of their mind to solve the problem just placed before it. This reasoning comes from the book Rich Dad Poor Dad, which is mentioned in the opening minutes of this Podcast Episode #15 - Where To Get The Money? Using Other Peoples Money (OPM) For Real Estate Investing Success - Part 1.
This is a two part episode, because while I talk about getting money from: Banks; Hard Money Lenders; Retirement Accounts (IRA/401K/TSP); HELOC; Credit Cards; Private Lenders; and even a line about Cash-Value Life Insurance - I spend most of this episode speaking in general about using debt to buy Real Estate. I even go into details of "Good Debt" versus "Bad Debt"; and a term from fellow Investor & Podcast Host, Jason Hartman - "Inflation Induced Debt Destruction". Because if you think ALL debt is bad, then we're done right there!
So listen to this Episode #15 - Part 1 of the [... and Landlord!] Rental Real Estate Investing Podcast and we'll continue in Episode #16 - Part 2 next week speaking more about Private Lenders - which is really where you want to get your funding from as you progress in your Real Estate Investing business. But you most likely want to start out using a Bank or Hard Money Lender, so I talk about that in this Episode, along with thoughts on how and where to get your 20% to 25% down-payment you'll likely need in addition to closing costs and reserves.