Financing for your next real estate investment deal

ListingSpark works to help our investor clients get their next deal funded. There are plenty of creative ways to do this, from all cash to zero down. Here we will explore what we’ve seen work best for our clients, and point you to some of our favorite ways to find funding.

1. Cash is King (most of the time)

If you have it, paying cash is one of the best ways to get your deal funded. You eliminate the need for paying any interest on a conventional or hard money loan and you get rid of a bunch of fees included in closing costs like origination fees for instance.

Another perk is that if you end up having to keep the home because you can’t flip it, depending on interest rates, you’re essentially seeing a similar return that you’d see investing in a low yielding CD or bond. Since you aren’t paying the interest rate on a loan it’s as if you’re realizing that return.

A really good article on BiggerPockets points out that almost 25% of investors purchase in cash. According to Realtor.com, this may be due to the fact that an investor can usually purchase well below asking in most situations. Although from the seller’s perspective, even a lower cash offer means a quicker close, no repairs, and less overall hassle.

However, before you buy cash, make sure that it’s the right method for you. Sometimes on certain buy and holds, you may want to even avoid cash.

2. Hard Money

Hard money is a good way to circumvent going through traditional lenders. Basically, it’s just using lenders that are usually private companies or even individuals to get fast cash, but at higher interest rates. Rather than looking predominantly at credit and income,  these loans look at the value of the property being purchased to determine how much money they will lend. So even if you aren’t in the best credit shape, you may receive a pretty large loan based on the home value. The lender uses the property as collateral since they can often still turn a profit even if the borrower defaults on the loan.

Although a bigger loan sounds great, before you take a look at hard money, we always suggest that you have a sound strategy for offloading the property. We’ve seen many investors get themselves into hot water when something they didn’t expect happens and they didn’t have a plan to sell the property. Sometimes longer than expected rehab times, or unexpected repairs will draw out the payments on the loan, making it harder for an investor to turn a profit, so they end up defaulting. Since hard money loans typically have higher interest rates, a small change in plans could really throw your numbers off. So make sure you have all your ducks in a row before purchasing with hard money.

There are some really great things however that can make hard money the best option. Since you’re not going through a traditional lender, you can typically close in half the time or less. Where a traditional lender may take a month or longer, a hard money deal can close easily in one to two weeks. As mentioned above, you also can get a much higher loan that’s not dependent on income or credit, making it great for someone who already has a great contractor and exit plan lined up, but doesn’t exactly have the money to get the property.

If you decide to go this route, ListingSpark works with a few trustworthy lenders that we highly recommend. If you don’t choose one of these guys, make sure that you are using someone that you really trust!

Check out these hard money lendes we’ve worked with over and over again and trust to get the deal done:

• Easy Street Capital
  
• Stallion Funding
• Wildcat Lending
  

3. Partnerships

Right here at ListingSpark, our operations manager just got finished with her first flip using the partnership method. For her, it turned out to be the best option.

It was super simple, we found a deal, crunched all the numbers and put our plan together. Then we found a partner willing to fund the project at a 50/50 split. It was perfect for our first deal. We didn’t want to go with hard money since it was our first project. Best of all, we didn’t have to put anything down!

Julie Daniels – ListingSpark Operations Manager

Depending on your experience, the profit margin in the deal and the amount of work you are personally putting in, the split can change dramatically.

Going to investor meetups are a great way to meet potential partners. If you happen to be in Austin, we recommend “Investor Underground” a great spot to meet others looking for deals. Also check out investor facebook groups. Pitch your deal and say you’re looking for a partner. If you have any questions about this one, let us help you out.  Give us a call and we can also shoot the deal out to some of our investors!

4. IRA’s and other private money

Similar to a hard money loan, but often at lower interest rates are finding private lenders to fund from sources such as their self directed IRA’s. For them it’s great because they don’t have to pay any taxes on the interest accrued. For you it’s great because you’re negotiating with an individual, so you may be able to negotiate the terms on the loan a bit better than other funding sources. Also, where in an equity partnership you may have to give up as much as 50% of the profit, where in a well negotiated private deal you can keep all the proceeds minus interest.

If you have any questions at all on ways to get your next deal funded, or need help getting pointed in the right direction please contact us. We are always here to help our investor clients on their next deal!