5 Tips to Obtain Private Financing (Or How I Bought My First Post-Bankruptcy Rental)
When I first saw this house online, I loved the area and feeling like there was something more to the house than just it being a rental home. It was an amazing opportunity to get back into the business I loved — the business I had so massively failed at.
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I knew where I wanted to buy, what kind of price point I needed and what kind of general rents were in the area. It was a gold mine of opportunity. However, having just gotten out of a bankruptcy and without much savings, we weren’t exactly your optimal buyer.
As a matter of fact, we wouldn’t be able to get a credit card with a $500 or $1,000 credit limit on it for nearly 5 years. At least without paying more in fees than we would have in the actual credit amount. So we needed someone who would lend to us with private or hard money and understand our situation, see the potential in the houses, the potential in us — and invest in us.
Before talking about the house, I want to explain something.
Learning to Hear “No”
Think about when you were a kid and you were selling something for your sports team, choir or whatever. And you had this chocolate bar to sell that was only $2, and it was the best-tasting candy bar you have ever had.
Or maybe it was the closest candy to you, and that was satisfactory enough. Either way, you had to sell it. You wanted the blah blah blah toy or la la la thingy they would give you if you sold some awesome number of candy bars. And there was the one kid in the class whose parents had a lot of money, and that kid always won selling the most candy bars and didn’t really have to work at it.
In the end, you had only one job: to sell. And really, to sell yourself.
The people in the end were most likely NOT buying those candy bars because they loved a $2 chocolate bar; they were buying them because they believed in you, your story and your goal. But those experiences as a kid help form our resolve to be persistent, to be tenacious — and to not be afraid of other people telling us “no.”
I experienced that firsthand working to find properties to purchase — and the hardest of all, finding someone to finance them.
It took me 27 times. 26 people in varying degrees had said “no.” Some attorney friends, some friends who were wealthy. Or others who already had properties. Others who were big time investors, and my numbers were just too small, or the deal wasn’t a flip. Or they just didn’t want to. No matter what, I heard “no” a lot.
But it only takes one “yes.” And eventually, with 40-50% cash down — and a high interest rate — I found my “yes.” And I found my property. And I had my first property since owning and then losing nearly a million dollars worth of real estate.
5 Keys to Obtaining Private Financing
1. Have Cash
Yes, yes, yes…I know people keep referring to “no money down” purchases and all that. I know. I’ve bought those, too. But listen, if things go wrong, if you need to fix something that breaks or drop $1400 on a tree service (we just did that on a flip we are doing) — basically what I’m saying is that things happen.
Besides, there are not many lenders out there who are going to put up funds to finance you without you having “skin in the game” or you having a lot more experience. In other words, don’t ask for someone else to put their money into a deal unless you have money to put into it too.
I have found that as I have more cash, I also have more opportunities. The guys with cash are the ones that can get into deals first. They can move the fastest, and they can garner the best deals.
2. Practice Your Elevator Pitch Down
If you are trying to explain to someone who are you asking to financing you, and you keep stumbling on why it would be a good idea for them to invest with you, it’s probably not going to happen!
You have to know the properties you’re going after. That market. The kind of ROI you are getting.
3. Nail Down Your Exit Strategy
When dealing with specifics on a JV or private financing, I have never had an investor who didn't ask when and how soon they get their initial investment back. Never. Make sure you CLEARLY explain how they are getting their money back — through a sale, a refinance or lease option.
Whatever it is, you have to have a plan A. And probably a plan B.
4. Add a Personal Touch
What makes you YOU? For me, it was my story — I told it to everyone I met with.
I wanted them to understand that I had a hunger to be successful and to achieve my goal of owning a large portfolio of rental properties. And because I had a setback in my business, I learned a lot, from how I structure the debt to how much leverage I tolerate to the amount of reserves we keep for each property. And I wanted it bad…and I wasn't going away.
5. Express How Badly You Want It
If you want it badly enough, you will do what you have to do.
Does that mean sell your really nice car and buy a more modest one? Does it mean stop eating out for 6-12 months? Or getting a 2nd job? Or living on a tighter budget? Yes. It does.
If you are only willing to say you want to be in real estate, but not sacrifice your time, your funds or your lifestyle now, you might not be able to get past a few deals. But if you hunger for it, you wake up thinking about it, and you keep after it, you will achieve your goals.
I ended up purchasing the house for around $20k several years ago now. We paid half down and paid for the make ready out-of-pocket.
It was just recently appraised for $60k — and we were able to take all of our cash out of that deal to move on to another one. It rents for $800 monthly, with the same tenants in it since we bought it. We jumped back in because we believed in our model; it made sense, and therefore we were able to have others who believed in it as well.
I encourage you to ask yourself, what are you truly willing to sacrifice? And what does the vision of your business in the future look like, so you truly have a clear picture of what you are working towards?
Let me know your thoughts in the comments below!