Hard Money

How To Buy Real Estate When You Are Broke

by Brandon · 16 comments

Buying real estate costs money. However – it doesn’t have to be your money.  With the right mix of resourcefulness, creativity, and knowledge you can buy real estate with no money of your own. Don’t believe me? I speak from experience! Nearly every single property I have ever purchased has been without any money from myself.  The following are seven strategies that can help you buy real estate without spending any of your own money.

  1. Use Hard Money– hard money lenders are private individuals who loan on property based primarily on the value of the property (read my post on Hard Money Lenders here).  Although lenders have been tightening their standards in recent years, they still will generally lend 100% of the purchase price and possibly even repairs if the deal is good enough. They need to feel secure in their investment, so if you only need $50,000 for a property that is going to be worth $100,000 – you may not need to put in any money. Just remember though – lenders are going to be conservative on their values so don’t overestimate the future value.
  2. Use your Home Equity – Do you already own your own home? Did you know you can pull out equity in the form of a Home Equity Line of Credit (usually a variable but low interest rate) or Home Equity Loan (usually a fixed interest rate but higher) to use to buy an investment? Not only is this money relatively cheap to borrow, you may also be able to deduct the interest on your taxes (but see a CPA for details).
  3. Use a Partner – Do you have knowledge, motivation, and skill but lack financial resources? You are in luck! Much of the professional world has financial resources but lack knowledge, motivation, and skill! Use your networking skills to find others who have the missing piece in your strategy and become partners. Make sure that everything is spelled out clearly up front and everything is in writing.
  4. Raise Private Money: Similar to a hard money lender, you may be able to find wealthier individuals who want to earn more on their investments than the stock market or a savings account can pay. Many real estate investors will offer their clients a set 12-20% return on their investment, secured by a lien on the property. This creates security for the private lender and funds for the real estate investor. A true win-win.
  5. Use a Lease-Option –  A lease-option is a strategy used in real estate to buy homes from homeowners without actually taking legal ownership. Instead, the real estate investor signs a long-term lease with the house owners as well as signing a legal “option” to buy the property at a specific price in the future. The owners are not legally allowed to sell the property until the option period is up, and the investor gets to lock in his future purchase price as well. The investor can then easily rent the property out for cashflow or find a buyer to sell his “option” to.
  6. Buy properties “Subject-To” – Buying a home using a “subject to” strategy involves actually transferring legal title from the old owner to the new investor – without paying back the original mortgage that the old owners had.  While the bank may not appreciate not being paid back, as long as payments are continued to be made, usually the bank will either never find out or never care. This strategy is a bit riskier, but as long as you have a backup plan, it is perfectly acceptable.
  7. Use a Combination – Finally, you can mix and match using any of the above scenarios. Perhaps use a hard money lender to purchase the property and use a partner to refinance into a thirty year fixed mortgage after the repairs are done? Or perhaps use a lease-option until you can raise private money to cash out the sellers?

As you can see, there are a huge variety of ways to buy real estate without sacrificing your own money. If you are resourceful and the deal is a good one, you will have no problem buying real estate without any money of your own. Don’t let “I’m too broke” become an easy excuse not to invest.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

How to Flip A House Without Losing Your Shirt

by Brandon · 2 comments

It my last blog post I discussed Five Reasons NOT to Flip a House.   House flipping is a risky venture, but by following these five tips you can decrease your risk and increase your chance of making a sizable amount of money in a short time.

  1. Make Your Profit When You Buy:  Never overpay for a piece of property. I’ll say it again: NEVER overpay for a piece of property. A good friend and great Real Estate Agent Sean once told me, “When I submit an offer and I don’t blush, I offered too much”.  Another way to look at it: If you are getting more than 10% of your offers accepted, you are offering too much.
  2. Get Favorable Loan Terms: If you can’t afford to use 100% of your own cash, make sure any loans you get are favorable to you. Hard money lenders can be excellent tools if used correctly, but make sure your term is at least six months longer than you expect to hold the property for.
  3. Double Your Budget, Double Your Timeline: Don’t underestimate the costs involved or the time it takes to complete a project. If you are not a seasoned flipper or you are going to do the work yourself – double your budget and double your timeline. If the project still makes sense, move forward. Remember, each month that the home doesn’t sell YOU must make all the payments. If you cannot afford to make them yourself, partner with someone who can.
  4. Make a Plan:  Never just buy a property and hope it will sell. Know it will sell. Do your research ahead of time by knowing what other similar properties have sold for, as well as the average length of time it took to sell.  Plan for the worst, hope for the best.
  5. Have Multiple Exit Strategies: Never allow “just sell the home” to be your only plan to unload the property. You need to always be thinking outside the box. Can you refinance the home into a 30 year mortgage if needed? Can you sell to another investor if needed? How about a lease-option? Be flexible and creative and you will find success a much easier task to accomplish.

Do you have other tips for successfully flipping a home without losing your shirt? Post them here!

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

To Flip or Not to Flip: 5 Reasons NOT to Flip a House

by Brandon · 2 comments

We love the flipping reality tv shows. Shows like Flip That House, Flip This House, Property Ladder, and a dozen other television shows have been popular over the past several years (remember Armando Montelongo?)  The abundance of these shows has made “flipping” properties appear to be the only real estate method worth talking about these days.  However, is flipping really better than a long term “buy and hold” strategy?

For those new to the business, “flipping” a home is the process of quickly selling a property for quick profit.  These homes are sold within days, weeks, or several months.  Many times the home is quickly remodeled with new paint, flooring, appliances, and more. On these television show, the “flippers” often make tens of thousands of dollars over the course of several weeks.

In contrast, the “Buy and Hold” method of real estate investing involves purchasing a home (hopefully at a low price) and holding that property for a long number of years, collecting both monthly cashflow and future profit.

While both methods can produce income for investors (and I have done both over the past five years,) I am a firm believer in having as many “buy and hold” properties as possible.

Here are five reasons why buying homes for the long-term is more beneficial than flipping:

  1. Residual Income: When you “buy and hold”, you create monthly income versus a one-time payment.  When you stop “flipping”, the income stops. When you stop acquiring homes to “buy and hold”, the income on the properties you already own continue to come in.  True wealth is only found when your money is earning you money, rather than your labor earning you money.
  2. Tax Benefits: House “flippers” pay a much higher tax rate than long-term investors. Additionally, “flippers” can become classified by the IRS as “dealers” of real estate, thus subjecting their income to regular tax rates and self-employment tax (Social Security, Medicare, etc). Long-term investors pay only long-term capital gains tax (or often not using a 1031 Tax Exchange) and income tax on the monthly cashflow (which is generally largely or completely written-off with deductions.)
  3. Agendas: A house flipper is subject to numerous outside agendas that affect if and how success is found. Hard-money-lenders, private investors, future buyers, partners, and others all have an agenda and their best interest at heart. When you buy-and-hold, the main agenda is your own.
  4. Whims of the Market: When flipping a home, you are hoping that you can sell the home quickly, which is largely based on how the market is functioning in your town. Are there far too many homes being sold, causing yours to sit for months or years? When you hold a property long term you are not dependent on the whims of the market. You are able to sell only when it is advantageous to sell.
  5. Risk: When you flip a home, you have monthly carrying costs such as the loan payment, taxes, insurance that will add up each and every month until the home is sold. Additionally, there is the chance that there will be unforeseen costs that arise when repairs are being performed.  Both these items can blow the budget and eliminate any chance of making a profit. When you buy a home for the long term (and manage effectively), you can balance out your risks over a long period of time, lowering the chance of losing money and maximizing your probability of building serious wealth.

With that said, I do want to emphasize that flipping a home is not always bad.  Often times flipping a home, when done properly, can add a sizable amount of cash to your wallet – which can be added back into future buy-and-hold investments.  As the phrase goes, “it takes money to make money”. While I am a firm believer in the concept of using “other people’s money”, it is always easier to use your own.  I believe in flipping a home only when you lower your risks considerable. Blindly purchasing a home in hopes of selling it quickly for mass profit is not only stupid, but dangerous to your financial future.  Next time I am going to talk about how to lower your risk when flipping a home.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.

Hard Money Lenders: Loan Sharks of the Real Estate Industry

by Brandon · 12 comments

Imagine a world where you have all the money you need, all the credit you could get, and banks pounding down your door to give you large sums of money for low interest. Nice isn’t it? However, the real world is a much darker place. In reality, trying to get financing from a bank is often like trying to shave Chuck Norris’ beard while he sleeps. It’s just not possible.  As they say, necessity is the mother of invention and Hard Money is the invention birthed by the need for financing.

What is Hard Money?

Hard Money is money that is obtained from private individuals or businesses for the purpose of real estate investments. While terms and styles change often, Hard Money has several defining characteristics :

  • Based on the value of the property
  • Short Term (6 – 36 months)
  • High Interest (8-15%)
  • High loan “points” (cost to get the loan)
  • Often do not require income verification
  • Often do not require credit references
  • Quick ability to fund
  • O.K. with property in poor condition

How Hard Money Is Used:

Compared to typical bank financing, Hard Money is ridiculously expensive!  Why would anyone use Hard Money? As I mentioned early: necessity. It may be an expensive way to do business, but if those costs are factored into the equation, it just might work for some people.  When investors cannot obtain normal bank financing, we will often use hard money as a “bridge” between purchasing and the resale or refinance.

Often times, house “flippers” will use hard money (as I have) to buy a property, fix it up, and sell it again. When it works, it works well. The lender may charge 4 points (4% of the loan) and a 12% interest rate, but if those costs are figured into the cost of the project this number is inconsequential.

How Do I Find Hard Money Lenders?

Hard Money Lenders can be difficult to track down, but there are several easy ways to find them.

  1. Look online. Many hard money lenders (both national and local) have websites and they need you as much as you need them. Search Google for Hard Money Lenders in your state to find some.
  2. Ask a Mortgage Broker – Some, not all, mortgage brokers can connect you with hard money lenders – for a fee.
  3. Ask House Flippers – Find some house flips that are on the market and find the owners or attend your local real estate investment club and ask around. Referrals are often the best way to find anybody good in business.
  4. Ask a Real Estate Agent. An agent that works with lots of investors should know several hard money lenders  – or at least be able to get you in contact with someone who knows them.

Should I Use Hard Money?

I have used Hard Money on a number of occasions, but I try to steer clear whenever possible. I am a strong believer in security and in the “buy and hold” method of investing. Hard Money – with its short term lengths – do not fit well with my investing strategies. I like to think in terms of “worst case scenarios”. If I try to “flip” a house using Hard Money, and am unable to sell that house before my term is up, I am in danger of losing the house to the lender.  I only use hard money when I have a clear exit strategy on a flip and secondary funding available as a backup.

Hard Money can be a great way to get into the “flipping” business, if that is the business model you are looking to get into.  However, you must weigh the risks with the reward to decide if this is a path you want to go down.

P.S. looking for hard money loans in California? Be sure to check out my friends over at northcoastfinancialinc.com. They have very competitive rates, can fund within a week and specialize in fix and flip loans and other hard money loans.