I need money! You have money? Where’s money? I need money. We all need money!
Although we are long since out of school, today I want to give you a pop quiz – an “exercise” if you will. I want to know what you would do? I no longer qualify for a mortgage since I’m self-employed. Sound familiar? Who even qualifies for a mortgage these days? Not a whole heck of a lot of people!
It’s easy to find a private lender for flips because the investor gets his money back in a relatively short amount of time. Assuming all goes well he may see his money plus a nice return in 3-6 months on average, earning probably 10-15% and up to 5 points or so. Not bad. Well what about rental properties? While rental properties (commercial or residential) are, in my opinion, the best long-term strategy due to the passivity of the income, the returns happen over a substantially longer period of time. This means that an investor who can help you finance a rental property is in it for the long haul which can severely limit your investor pool.
Past Creative Financing Methods
Here is what I have offered in the past to investors and it has worked out nicely. The investor puts up the cash necessary to buy the property, usually a 20% down payment and closing costs for the mortgage, and I take out the mortgage in my name and manage the purchase and ownership. He contributes capital, I contribute risk and management. In return, we split the net 50/50. The net includes profit or loss and a sale if we decide to sell. This has worked out great for me so far with the properties I currently own, especially since my ROI is technical infinite in this setup because I’m zero cash in. That is hard to beat.
However, this chapter of creative financing is officially over for me now. I left my corporate job four months ago meaning I won’t qualify for a mortgage again for at least two more years after I can show proven income (if even then). Now I can’t offer my half of the deal to an investor. I also don’t have enough cash on hand to fund an all-cash buy or a high down payment for private financing.
I have people email me all the time wondering new ways of creative financing. I can explain all day long the methods I know and that have worked for me, but what methods even I don’t know about?
Let’s talk about the property so you can see why I want this thing.
Duplex, Built in 1945, Fully Rehabbed, Tenants in Place.
Purchase price: $155,000
Market value: $180,000 (bonus!)
Total monthly income: $2,200
Total monthly expenses: $797
(Includes property taxes, insurance property management fee, vacancy estimate of 7% and repairs estimate of 5%, does not include a mortgage payment)
Estimated monthly cash flow: $1,403
Cap rate: 10.86%
Are you as sold on this place as I am? What do you think? And how would you buy it, assuming you have no capital to put down on it and don’t qualify for a mortgage.
Experienced investors, where are you? Speak up! What creative financing options work in this scenario?
Photo: D Services