How to Choose the Best Source of Funding for Your Next Real Estate Deal

by | BiggerPockets.com

The biggest question I get when meeting new and experienced investors in this business is, “Where do you find the money to fund your deals?” It is important to know the different types of funding sources to use on your next buy and hold and your next flip.

Related: The Power of Private Financing: 3 No Money Down Strategies That Actually Work

However, it is even more important to know when it is appropriate to actually use these various funding sources. You can be badly burned (and lose a lot of money) if you use a funding source for the wrong deal. In today’s video, I review some of the key funding sources from traditional lending to private equity to private loans. I also share how to best utilize each type of funding source.

Let’s get a discussion going. What did I miss? What is your criteria to determine when to use the various funding sources?

Thanks for watching!

About Author

Matt Faircloth

Matt Faircloth, Co-founder & President of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, is a developer and owner of commercial and residential property with a mission to “transform lives through real estate." Matt, along with his wife Liz, started investing in real estate in 2004 with the purchase of a duplex outside of Philadelphia with a $30,000 private loan. They founded DeRosa Group in 2005 and have since grown the company to owning and managing over 370 units of residential and commercial assets throughout the east coast. DeRosa has completed over $30 million in real estate transactions involving private capital including fix and flips, single family home rentals, mixed use buildings, apartment buildings, office buildings, and tax lien investments. Matt Faircloth is the author of Raising Private Capital, has been featured on the BiggerPockets Podcast, and regularly contributes to BiggerPockets’s Facebook Live sessions and educational webinars.

13 Comments

    • Matt Faircloth

      Hi Michael,

      That’s awesome. So you were able to help someone coordinating a syndicated deal (AKA private placement) by funneling some money into the deal? Great. I have shared a chunk of the equity in a few deals for helping raise money, underwriting the deal, or being the local legs in an area that I don’t currently have a team in place.
      Are you willing to share some more details on the deal here?
      Matt

    • Matt Faircloth

      Hey Ola,
      I would assume that the commercial deal you are looking at is a long term hold target? If so then yes you should do private equity. The other way to go would work if there is a bunch of value add work to do. In that case you would buy it with short term money like a private loan and then refinance it once it’s stabilized. Make sense?
      Matt

  1. margaret smith on

    Matt, simply and well stated!
    I am a hard money lender who does short term fix and flips, as well as longer term (5 year) balloon loans for people who want to buy/hold/season/re-fi with a bank. Lately I have done JV’s, where I am the money, my Buyer/Borrower/Rehabber does the work. He buys the property, I provide the funds to buy it, then escrow funds for the rehab, and give that out in draws as receipts come in. I protect myself with a mortgage filed on the public record, but the mortgage (and the unfiled Note) refer to the Operating Agreement, which takes precedence over the terms of the mortgage. Per the OA, we add up our basis, calculate the profit at sale, and split the profit 50/50 for distribution of checks at closing. If the whole deal goes down in flames, I at least have the mortgage filed, in first position, and am owed a bottom line reasonable rate for money, plus of course my loan principal. The percentages of profit sharing can always be adjusted according to the context of each deal.

    BTW, I can and do do all these loans from my self-directed IRA, as well as from personal funds.

    What I don’t know how to do is to bring one or more people in on my deal when my own funds are too short. I should be compensated for putting the deal together, doing the contract work, all my time in creating the deal– but cannot act as a paid “broker” according to SEC regs. I end up borrowing other people’s money with a promissory note, and then lending it out for more. This has it’s pros and cons, natch!

    I have been told I can create an LLC with multiple members to do a JV with multiple funders. Any ideas on this, or other ways for multiple lenders to come together, without being syndicated?

    • Matt Faircloth

      Hey Margaret,
      Thanks for sharing your experience and your thoughts! I’ve only done deals in long term holds for apartment buildings, never anything involving a collective doing joint venture loans. I think your idea of an LLC is a good one, but I would start with a local attorney in your state to make sure it works in your area. With regards to you staying in control, you can either set yourself up as the managing member of the LLC or use a Limited Partnership arrangement with you as the General Partner.
      Matt

  2. Shelly Scruggs on

    Hi Matt, I am a newbie with one rental looking to continue in the buy and hold niche. My question is, where can you get closing cost assistance if you are new and trying to build a track record. Don’t have a lot of capital but excellent credit. I am in the process of refinancing the rental for a lower monthly payment because I am upside down so I figure I may as well try and lower the payment while also bringing the balance down, but I want to purchase more properties. Thanks for your feed back and this was an awesome piece.

    • Matt Faircloth

      Hey Shelly,

      Thanks for the question and for reading the article! Congrats on your refinance. For buying new properties, here are some thoughts if you are short on cash:

      – ask the seller of the property to “hold paper” meaning provide you with a loan of part or all of the sell price. You can do this temporarily until you can refinance the property or long term if they give you a good rate.
      – Use a bridge lender like a hard money lender to get you into the property and fund the renovations, then do a refi to take them out.
      – Enroll an investor to front you the money and come on board as a partner on the deal – you do the work and guarantee the mortgage as your equity.
      – Open up a 0% interest credit card and borrow the money from that. This is a ticking bomb as the rate will go up eventually so make sure you can either refinance or pay down the loan out of cash flow.

      I hope that helps!!

      Matt

  3. Julia Sandoval

    So, i am a newbie and im stuck getting funded as my debt ratio is preventing my loan for a duplex. My credit score is excellent and the duplex has plenty of equity. In fact im purchasing from grandma so a gift of equity for down payment is my option, but unfortanetely that is not good enough. Can anyone point me in the direction of other options in the salt lake city area. Im getting a killer deal on this duplex and i do not want to let it slip away.

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