Originally posted by Tyler McCracken on 1/1/2009 on www.askthelandlord.com
I’ll thank T.., in her New Year’s Eve post for mentioning the need to find additional funds for a new purchase in the New Year…. a need for creative funding to make it happen…
its somewhat ironic that it was mentioned and i was asked to post with regards to this subject…, as i was just given a Private Money Funding Prospectus (boilerplate via Vena Cox-Jones btw) from an associate in our local Metrolina Real Estate Association for my review and opinion. Reading through it as with all these boilerplate prospectus’s show (whether it be from Vena, Lou Brown, Alan Cowgil, or whomever it is claiming to have cracked the code) just how ‘Un-Professional’ they really are. I found sentence syntax errors and even mis-spellings. Now I don’t profess to be Mr. Perfection in my own writing as you all know from my rambling muse; however, that’s just what it is -rambling muse not a business proposition. I would state that it is OK to use a boilerplate prospectus as a template but not to copy.
Ok. With that said, my primary business has been as a Hard Money Lender funding real estate investors in thier acquisition and rehabbing of both short & long term properties for fix’n’fliping or fix’n renting to refi. My business has felt the wrath of our national sucking sound of both demand and valuation in our local real estate market. For at least our local market, rentals are performing well; unfortunately, most of the other real estate strategies for making money (as a generalization) are not.
Still the greatest problem even for the landlord implementing the rental strategy is some form of “Permanent Financing”.
Most permanent financing loans do not exist today as we now it. With the credit & financial markets crisis, we have lost the secondary bond market that buys the permanent financing loans that we as investors need. There really is no secondary market today that buys our loans from financial institutions. Therefore, the only buyers of these loans are FHA, Fannie, Freddie, and Ginnie. For a bank to fit its present bank model of selling loans to then turn the money to write new loans, it needs to sell them and must conform to the buyers guidelines. These guidelines due to the above mentioned buyers is limited to four loans max for an individual to get convention and non-conventional 1-4 housing loans. So what does that leave us??
Here are some examples:
Subject To (not a fan of…)
Private Money (family, friends, and any individual and/or business acquaintances)
Self-Directed IRA/401K Private Money (same as private money)
Let me state they I am not a ‘Subject To’ fan due to the right of the Lender to call the loan assuming it is not an ‘assumable’ loan and its really is better suited as its own topic. And I will not focus on commercial loans as they are typically not associated with ‘creative’; although, creativity can be involved with this type of funding. Really it is also another topic.
Let me give some examples of the type of creative funding I have done in the past:
Two years ago I knew an investor that both operates as a landlord and owner-financier of property he sells. He had a property that I identified as a good value and I approached him with regards to selling. We agreed to a tax value sale of $60k. We agreed that I would put down @$13K with him providing @$47k in owner financing at 8% amortized at 30 years with a 5 year balloon. Payment of $347/month. I put @$13K into that property and sold it @7 months later for @$105k. The profit is not the focus. Once I was under contract I approached my Owner Financier and asked him if he would consider ‘Substituting Collateral’. Now I did not have a clause in our loan giving the right to do this if appropriate new collateral (property) is provided.
What did I do to give him confidence in keeping his money working with me?
When I deal with a private investor, I always set them up to be paid early. If its an interest only payment, I do it automatically with an Online Bill-pay. If the payments include a principal pay-down amount, I print out a check with stub outlining which portion is interest and principal. So if a payment is due on the 1st of the month, my investor is getting a payment by the 27th. Not mailed on the 27th -more than likely mailed on the 25th or 26th. I have some investors that get their checks a month in advance -now they do hold them till the payment date that is on the check.
So what is the point of all this? Remember as a landlord how you filled your first rental with a resident and what you did and thought as the 1st of the month rolled around? I know what I did. On the 29th, 30th, 1st, 2nd, and the 3rd of the month i went to my mailbox and looked for that rent check. Everyday I opened that mailbox and it was empty, was another day that opened my mind to concern or what I’ll phrase as the ‘what ifs’. You see when its not there I begin to think, Oh know will I have to call (hound) them for payment, evict, is there damage, a skip-out with front door wide open, etc., etc. Do you see my point? I’m certain my lender thinks somewhat the same thoughts everyday my payment isn’t in that mailbox around the due date time. So, I eliminate this worry. Believe me it instills confidence in one’s investment when this is eliminated.
The other benefit I provided as ‘Improved Collateral’. The substitute property I provided was of greater value. I owned another property free and clear and offered a 1st position on this new property with a standard attorney closing and full work up including fire policy insurance and title insurance.
Two and a half years later, he still gets his monthly payment before its due and has good collateral. I received the $105k sale (minus closing expenses) cash in my hand for other deals and moved the loan to a property that rents for $625/mo while the debt service is $347/mo. If you look at it from another angle…, even if I didn’t make a profit on the originally owned property by my lender, I was able to get this lender to finance a loan on my free & clear property that I bought for $40k and put $6k in it. Know it has a $47k loan against it -another no money down after the fact example.property. Think about that for a minute.
Here’s a small example, but an example of how i started with my first real estate investment purchase (after converting my first home into a rental). I was out looking to buy a duplex as that is all I thought I could afford. As I turned the block from a prospect, I rolled upon a big old building with a ‘for sale’ sign. It was a four plex listed for $129k (now this was over a decade ago). When I inquired it included a vacant lot next door. My offer was for $108K without the lot. The out of state investor replied back that the lot was of no value so it would be included. So I countered at $112,5k for the 4-plex and a separate contract for the lot for $1.00. Yes, that is correct One dollar.
What did that do for me? By separating that lot from the 4-plex, it provided an unencumbered vacant lot versus buying them both on one contract and thus giving the bank the natural progression/opportunity to secure it with their loan. I sold that lot for $35K @ two years later and 1031’d (tax-deferred exchange) into a 2,000 square foot Victorian sfh turned into a duplex four doors down from the 4-plex & lot for $84k. that’s another story.
Back to creative financing. so for the 4-plex purchase, i needed a bank loan and got a $110k bank loan. But, I needed another $2.5k purchase price, $5k in closing costs, and $5k for fix up (it was in real good shape). Guess who gave me the 2nd Loan? My grandmother. Remember: Doing business with family is another topic! So I got that 4-plex for no money down and started cash flowing the 2nd month of ownership. Today, I have a 30yr fixed loan at 6.25% with a PITI payment of @$1,378/mo on a $179k loan. The rents run @$2,500/mo.
Did you see/hear what I just said in those last 2-3 lines? Original purchase for $112.5K. No money down. sold lot for $35k. pulled out @$66k with new loan at $179k and debt service/taxes/insurance (PITI) runs at @51-53% of rents.
Over a decade later that private investor (grandma), has provided alot more funds for financing in my real estate operations. what are the benefits? she makes more money with me than she would with what she’d invest in alternatively and we provide good collateral, not to mention that her monthly payments come ahead of the due date. Notice I mentioned her (the lenders) benefits first. That is what it should be all about and what most fail to realize. Remembering this will put you ahead of others in all facets of your life. If you need help from others, you need to put them first and as a result I think you will find that you will get what you need (not always necessarily what you want).
So here are just two examples (of many), both involving some creativity and an alternative to just straight out bank funding.
Post some of your thoughts and examples! Ask questions! Let’s keep this thought stream rolling with give and take to fine tune all the ways we can creatively reach the goals we aspire to.