Cash is king, but you really don’t need it to buy real estate. It sure helps, though. One of the best things about real estate investing is the high availability of credit, or Other People’s Money (OPM). But, finding OPM can be difficult. Here are the best ways to get funding for your investment.
Cash
Earn the money yourself. Keep your W2 or do odd jobs. Take at least 10% of every paycheck and save it. It’ll take a long time to raise enough money, but it’s yours, and you can spend it how you want. Just don’t spend it on anything but investing! Most people start here because they can’t get bank financing without a down payment. If you buy a place with all cash, it’s easy, but you lose a great investing advantage: leverage (the bank).
The Bank
This is the next way which most of us source money. It’s the most efficient method, behind cash. Banks have been doing this for a long time and they have many employees to work the transaction. The downside is that you will have to submit your financials to be scrutinized. You’ll also have a lot of paperwork and have to wait on the bank’s timeline. You’ll pay interest for your loan, but this is typically the lowest interest and thus the cheapest cash you can get which isn’t your own for your deal. The bank is the second place most of us go for cash, right after our own money.
Lines of Credit
This is technically from the bank as well. The investor sets up an LOC with the bank and draws money when needed. When not needed, no interest accrues. The only thing paid is some annual fees. I’m a huge fan of LOCs and have them ready on many of my properties for when I need some quick cash. Interest rates are typically higher, but the investor often only has to pay back interest and not principal (interest only loan).
Partners
After the bank, partners are usually the next source of funds. Often, the investor will go to the bank and find that they will need to bring more cash than they have to close the deal. They might then want to take on a partner with some money. Occasionally, a few people will get together and decide to invest together because they like each other. This is often a bad idea, because they are creating a business, and things can go bad, which harms their relationship. This type of partnership is called a joint venture. It can be set up so that one person does most of the work and the other brings most of the cash. The percentages can be anything they agree on.
Friends and Family
These guys might be partners like above, but they may also be more like investors. Often, they will not look at the deal very closely because they are relying on the investor, whom they know and trust already. A written agreement really must be created though it often is not. The friend or family might get paid back at the end of the deal or during it. Downsides to this include alienating friends and family if the deal goes bad, and sometimes banks don’t like funding coming from unknown entities as this can add risk to the bank. Friends and family is sometimes referred to as Private Money.
Hard Money
This is a short term loan from someone who is not a bank. These guys will look at the investor and the deal, but they don’t have as stringent guidelines as banks. They will fund properties which a bank would not, such as ones requiring a lot of rehab. These loans are short term (usually less than a year) and have a high interest rate (double digits often). Though, as the investor works more with the hard money lender, the risk lessens, and the terms get better. This is often a good way to raise part or all of the necessary funds. With hard money, the investor might not have to bring any money into the deal to start. The risk for the investor here is the need to pay all the loan back in the short term. Usually, they will do enough rehab that they can then get a loan from the bank or sell. If they fail to do so, the lender might take the property. Ouch!
Limited Partners
This is typically a syndication deal, which I do. The syndicator finds investors and brings them to the deal. The investors can be anyone, friends, family, strangers, companies, etc. It’s a lot of work to put together the paperwork and get investors, but can open doors to much larger deals.
Seller Financing
Let the seller become the bank! This is great for the investor, as the seller already knows the property and doesn’t have to look at the books. The seller might finance the whole deal and the investor can come in with no cash at all. That’s unusual, but possible. Usually, the investor will need to pay some money, often enough to pay off the seller’s current loan. The interest rate will often be lower than what a bank would offer. The term of the loan will be shorter, just a few years, as the seller wants his money quickly. There is risk to the investor if they don’t get the loan paid off in time. The property could go back to the seller.
Crowdfunding
I’ve never done this so don’t know how easy it is. You can go online to platforms like CrowdStreet and put in your deal and hope that others invest in it. No idea how good this is, but I put it in for completeness.
In the end, there are a ton of methods which you can use to buy that dream investment without using all your money. Doing this can allow you to buy something much bigger than you ever could otherwise. It is almost essential if you want to scale quickly. Let me know if I missed your favorite method.
