Life isn’t all peaches and cream when you are dealing with home equity loans and lines. They sound great, but you need to understand the risks inherent in such loan products. If the funds are misused, tapping into your home equity can be disastrous to both your real estate investing business and your personal finances. Because a home equity loan is based on the equity in your primary residence, the lender can place a lien on your home; if you don’t pay the money back, the lender will then foreclose on your home and kick you out on the street, severely damaging your credit in the process. The obvious solution is to simply pay your bills. If you do, you don’t need to worry, right? It’s not quite that simple, actually. You need to be aware of a few more dangers and pitfalls. Don’t let this information scare you, but you need to know about these risks so you can prevent yourself from making the same mistakes other investors have made. 3 Risks and Drawbacks of Using Home Equity 1. Over-leveraging As you learned earlier, during the mid-2000s, banks were allowing home-owners to take out far too much equity in their home, a condition known as “over-leveraging.” Although banks are no longer providing 125% loans, many will still allow you to take out up to 90% of your home’s value. Is 90% too much? That is a matter of personal opinion, but understand that values go up and values go down. As of the writing of this book, values are increasing around the country at a rapid pace. As a result, we may see a decline in values in the future (what goes up must come down!), though no future is certain. If you obtain a 90% LTV loan on your primary residence and property prices drop 20%, you’ll quickly find yourself underwater and will be unable to sell your home without coming to the closing table with a significant amount of cash or doing a short sale. Leverage can be a great thing, but over-leveraging can be dangerous because it limits your options. If you don’t plan on selling, and you have a fixed rate mortgage, being underwater may not be a big deal to you, because your payment won’t change. However, over-leveraging does remove options, and having options is key to success in real estate. The more options you have, the more opportunities you’ll have for success. Related: FHA Streamline Refinance: How to Lower Your Monthly Payment & Preserve Home Equity 2. Less Cash Flow Additionally, by using your home’s equity to fund a down payment or the entire purchase price of a property, you are decreasing the amount of cash flow you would normally receive. For example, when we talked about Jessica and her use of $18,000 of her home equity line of credit to fund her real estate down payment, note that her monthly interest-only payment on that $18,000 was $60 ($18,000 x 4% / 12 months). Although this is not a huge number, it is $60 less that Jessica gets to keep. Therefore, if you plan on using your home equity to fund your real estate purchase (or even just the down payment), getting a killer deal on the property is even more imperative, to make up the difference. 3. Adjustable Rates A third danger of home equity loans and lines is something I’ve touched on a few times already: the potential for an adjustable rate. Each lender will have different terms, rates, fees, and requirements for their loan products, but if you end up with a lender who offers only an adjustable rate loan, it’s extremely important that you fully understand what you are getting into and the potential for what could happen. I call this Worst Case Scenario Analysis, and it’s helpful to use when considering an adjustable rate loan. Essentially, I like to look at what the worst case payment would be for that loan, and if it would still make the deal work, I’ll consider doing it. Let’s look at the example of Jessica, who used an $18,000 home equity line of credit to fund her down payment. Because the loan was not fixed, her interest-only payment could change. If you were to look into the fine print of her line of credit (which Jessica did before taking out the line), you would discover that the line of credit was capped at increasing by no more than 2% per year, for a maximum interest rate of 24%. So, let’s do a Worst Case Scenario Analysis on this deal and see how it pencils out: Current loan amount: $18,000 Current interest: 4% Current minimum payment: $60 Worst Case Scenario loan amount: still $18,000 Worst Case Scenario interest: 24% Worst Case Scenario minimum payment: $360 per month Wow! You can clearly see the danger of an adjustable rate loan or line of credit in this example. Jessica’s initial payment was just $60, but if interest rates were to go crazy, she could end up paying closer to $360 per month for that money! Related: The Home Equity Line of Credit (HELOC) Interest Deduction: What You Should Know Before Filing Taxes So the question is, is it worth it? For Jessica, the answer was yes. She knew that the loan could only increase by 2% per year, so it would take a decade to reach its max, and Jessica planned on snowballing that debt and paying it off in just a few years. Additionally, Jessica bought a deal with an incredible amount of monthly cash flow, so she knew that even if the worst case scenario happened, she would still be able to make the payment using nothing but the cash flow. The key to using the Worst Case Scenario Analysis is fully understanding the Worst Case Scenario. Dig into the fine print from your potential lender and find out how bad things really could be. On a recent variable rate mortgage I received, I learned that the interest rate was capped at 11%, meaning it could never climb higher than 11%, no matter how high the market rates might rise. When I looked at the numbers and ran it through a Worst Case Scenario Analysis, I discovered that at worst, my payment would increase from $600 per month to $800, but because I’d be receiving almost $2,000 a month in rental revenue, I could handle the worst case scenario and receive slightly less cash flow if everything went sour. [This article is an excerpt from Brandon Turner’s The Book on Investing in Real Estate With No (or Low) Money Down.] Do you use home equity to invest? Why or why not? Leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

Finding a property that’s a good investment is only half the battle. Unless you have enough money to buy the property in cash, you’ll have to find a way to finance the deal. And if a traditional mortgage is out of the picture, you’ll need to get creative. 4 Unique Financing Strategies to Consider If a traditional bank loan isn’t an option, then you may find the following unique financing strategies enticing. 1. Seller Financing Seller financing is the first thing that comes to mind. With seller financing, the seller of the property acts as the bank and agrees to sell you the property while accepting monthly payments for a predetermined period of time. This method only works if the seller already owns the property free and clear (or has a very small amount of outstanding premium remaining). It also has to work out just right since a lot of sellers don’t want to deal with what seems like a complicated process. Related: The Comprehensive Guide for Financing Your Very First Real Estate Deal 2. High Leverage Investing Have you ever thought about high leverage investing? This method is notably risky, but can work if you have some time, experience, and the financial means to take a loss and still be fine. Futures trading is one of the first investment niches that comes to mind. It can be complicated and challenging, but futures trading offers massive leverage. Thus, if you know what you’re doing, you can turn a small amount of money into a large amount of capital in a short period of time. As a result, you may be able to put a down payment on a property without having to bring on other investors. 3. Hard Money Lending Many investors have found success using hard money lending. Hard money lenders operate in a private mortgage market and lend their own money to investors in return for higher interest rates and shorter payback periods. The benefit of using a hard money lender is that their requirements are usually less stringent and the approval process takes far less time. You can often find hard money lenders in local investment clubs or even in your social circle. Related: How I Went From $0 Net Worth to Qualifying for $1M in Real Estate Financing in 2.5 Years 4. Peer-to-Peer Lending Over the past few years, peer-to-peer (P2P) lending has gone from a cute little niche strategy to something that a lot of successful real estate investors are using to finance deals. P2P lending is essentially an investment version of crowdfunding. Large pools of people come together online and contribute varying sums of money until the entire deal is financed. The investors then get principal plus interest back in return. This allows someone with limited resources to purchase a piece of real estate. Making Your Deal Financing Work Would it be nice to qualify for a traditional mortgage on every investment property? Would it be even nicer to have the resources to purchase real estate in cash? The answers are yes and yes, respectively. The problem is that the average investor—folks like you and me—can’t always make this happen. And it’s at this point that you have to decide whether you want to throw in the towel or find a way to make it work. Making a deal happen is rarely easy or straightforward. You’ll have to get creative, which could mean trying one of the alternative financing strategies discussed in this article. And until you give them a shot, you won’t know if they work. Have you tried any of the above strategies? What’s your go-to creative financing method? Leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

One of the most common ways to get started with real estate investing is to utilize some form of private lending. There is a lot of literature on the subject of finding private lenders and convincing them to invest in your deals. But what does a private loan actually look like? What are the terms and how do these loans actually work? This is actually a really simple topic, but it seems to be somewhat ignored in the world of REI education. At the core, private loans are very similar to conventional loans. In fact, I would say they are very similar but much simpler! Below is a quick guide to help you understand what it means to borrow money from a private lender. What is a Private Lender? I define a private lender as an individual (or small group of individuals, e.g. a married couple) who loans money. That’s it! This lender is “private” because you are borrowing from a person instead of a financial company or institution. In some cases, these lenders seek liability protection through an LLC or corporation, but in general, private lenders are individuals. It’s important to distinguish private lenders from hard money lenders. While these two categories do have some commonalities, they are certainly not the same. Hard money lenders are institutions with well-defined lending criteria and terms. Their core reason for existence is to lend money and make a huge return. On the contrary, private lenders almost always have other primary jobs, careers and/or business ventures. They are usually lending money as a side project to something else that takes up the majority of their time. Private lenders come from all different careers and backgrounds. A common source of private money is from your immediate social and family networks. Parents, uncles, in-laws, neighbors, co-workers, and fellow volunteers are all common sources for private lending. Related: How My Investor Friend Grew a Student Housing Empire Using Private Money 3 Key Documents The Promissory Note The promissory note is the core document of any private loan. The promissory note is the contract signed by you and the lender indicating all the relevant and import details about the loan and the loan repayment. This document can be as short as one paragraph or as long as 30-page document. While there is no set standard for what a promissory note should look like, most tend to include the same terms and conditions. The Mortgage Many loans will also have a mortgage. A mortgage is a separate document from the promissory note. The mortgage details the real property that is to be pledged as collateral for the associated promissory note. Depending on your agreement, your private lender may or may not require a mortgage. As many of us a know, a mortgage allows the lender to foreclose and take possession of your property should you default on your loan. The Amortization Schedule The amortization schedule lays out all the payments you will make on the loan. This is usually a large table indicating date of payment, principal amount, interest amount, remaining balance, etc. Loan Terms Please keep in mind that the examples below may or not be typical. I am simply providing my personal experience. I am sure there are many loans that are way different from what I describe below. Nonetheless, I hope you find use in real numbers. Principal The amount of money being loaned. At some point in time, this money must be returned to the lender. This can be paid in monthly installments, a one-time balloon payment, or a combination of the two. My experience: There is really no low or high limit to private loans. I’ve borrowed as little as $5,000 and as much as $210,000 from private lenders. My average loan is about $50,000.  Interest Rate The interest rate is usually the main cost associated with any loan. To you, this is considered your “cost of money.” To your lender, this can be translated into “return on investment.” Interest rates are usually defined in annual terms. However, it is common for interest to be calculated/compounded on a monthly basis. Many investors are not familiar with how your monthly interest payment is calculated. Your interest is actually accrued on a daily basis from the day of your last payment. The annual interest rate is converted to a daily rate by dividing by 360 (sometimes 365, depending on the lender). Accrued Interest = # of Days Since Last Payment x ([Principal Balance] x [Annual Interest Rate] ÷ 360) In a traditional, amortized loan, you pay off your total accrued interest + a little principal with every payment. As you move through the amortization of your loan, the proportion of your payment allocated to interest decreases while the amount paid to principal increases. My experience: For the most part, private lenders are happy with an interest rate that is at least as high as what they might expect from more traditional investments (e.g. the stock market). I’ve paid as low as 7% and as high as 16% on private loans. My average interest rate is 8%. Points/ Loan Initiation Fee This is an additional cost added to some private loans (and conventional loans for that matter). This is often a flat fee that is paid at closing (instead of “paying” the fee, points are often withheld from the principal at closing). Points will usually be represented as a percentage of the loan principal. My experience: I’ve only had one private lender charge points. In this case, it was 3% of the loan principal. Most family and friends do not charge points. The lender I was working with was bordering on being classified as a hard money lender.  Amortization A loan’s amortization is the time over which the loan principal is repaid to the lender. If a loan has an amortization of 10 years, the loan principal will be paid in full after 10 years (assuming the borrower makes the required monthly payments). The longer the loan’s amortization, the lower the monthly payment and the higher the total cost to the borrower over the lifetime of the loan. Related: 4 Simple Steps for Newbie Investors to Start Raising Private Money It’s also possible to for a loan to be “interest only.” In this scenario, your loan does not amortize at all. Instead, you make monthly interest-only payments until a scheduled balloon payment. My experience: About half of my private loans are interest-only. The other half are almost all 5-10 year amortizations.  Term The total amount of time you will have an outstanding balance on the loan principal. Often, the loan amortization is the same as the loan term. In these instances, your final payment of principal and interest fulfills your obligation to your lender. In cases where the term is shorter than the amortization, we have what is called a “balloon payment.” A balloon payment simply means that on a date specified in the promissory note, the remaining outstanding balance is due to the lender. The borrow must find some means of repaying the entire remaining principal (refinance, sale, new loan, cash). My experience: Interest only loans are typically due within one year. Amortized loans are usually due within 3-5 years.  Prepayment Penalty A prepayment penalty helps to protect the lender against the borrower getting out of the deal too early. A lender makes a decision to lend based on the length of time he/she expects to make a profit on the deal. If they go into a deal expecting to receive interest for 10 years, they may be upset if you were to pay off the loan after only one year. Enter prepayment penalties. These penalties are usually a percentage of the original or remaining loan amount. They must be paid if the borrower pays back the lender too early. My experience: Most of my private loans have short enough terms that the lender does not bother with a prepayment penalty. Loans with terms of 20 or so years may have a prepayment penalty for the first few years.  Examples Now that we understand typical terms included in a private loan, let’s see them in practice. Below are four examples to give you a taste of the types of private loans you may come across. Example #1 A loan with the following terms… Principal: $100,000 Annual Interest Rate: 8.25% Points: 0% Amortization: 10 Years Term: 10 Years Prepayment Penalty: 0% Paid Off at the End of 10 Years Would mean…. Monthly Payment: $1,226.53 Last Payment: $1,226.53 Total Cost of Loan: $47,183 Example #2 A loan with the following terms… Principal: $50,000 Annual Interest Rate: 11.00% Points: 2% Amortization: 10 Years Term: 5 Years Prepayment Penalty: 0% Paid Off at the End of 5 Years Would mean…. Monthly Payment: $688.75 Last Payment: $32,366.45 Total Cost of Loan: $24,002.71 (interest:23,002.71 + points: $1,000 = $24,002.71) Example #3 A loan with the following terms… Principal: $75,000 Annual Interest Rate: 10.00% Points: 3.00% Amortization: 10 Years Term: 10 Years Prepayment Penalty: 5% in year 1, decreasing by 1% each year, 0% after year 5 Paid Off at the End of 3 Years (2% of remaining balance as a prepayment penalty) Would mean…. Monthly Payment: $991.13 Last Payment: $61,879.37 (balloon payment: $60,693.53 + prepayment penalty: $1,203.84) Total Cost of Loan: $23,836.94 (interest: $20,383.10 + points: $2,250.00 + prepayment penalty: $1,203.84 = 23,836.94) Example #4 A loan with the following terms… Principal: $100,000 Annual Interest Rate: 12.00% Points: 0.00% Amortization: NONE — Interest Only Loan Term: 1 Year Prepayment Penalty: 0% Paid off at the end of 1 year Would mean…. Monthly Payment: $1,000.00 Last Payment: $100,000.00 Total cost of loan: $12,000.00 Private Loans Are Simple They may seem intimidating, but private loans are really simple. Once you have one or two under your belt, the terms of a loan will seem like second nature. Don’t down play the importance of opening up your business to private lenders. You never know when a private lender will become your one and only source of funding on a career-changing deal. Investors: Do you use private money to build your business? Why or why not? Let’s talk in the comments section below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

Unless you’ve been keeping residence under a rock someplace, you’ve by now listened to the BiggerPockets Podcast 108, which features entrepreneur and real estate mogul Grant Cardone. The show was one of the best for sure – almost as good as mine. Grant is the master of his universe. A lot of folks should be motivated by this podcast. However, if you listen between the lines — and you don’t have to dig too dip — Grant doesn’t not have too much love for the no money down (NMD) approach to investing. He makes this point of view known elsewhere as well. In fact, Grant and those who agree with his point of view don’t see NMD as investing at all. Since you absolutely can’t argue with Grant’s success, and he obviously must be taken very seriously, where does this leave Ben Leybovich, Brandon Turner, and 95% of the people on the BiggerPockets Forums and this blog? ‘Cause I hate to break it to Grant (like he cares), but most people have neither the kind of money to facilitate his style of investing nor the capacity to form businesses that can throw off this capital. Why NMD is Not Investing According to Grant Simple — the way he sees it, investing is defined as protecting and increasing equity, buying power, and magnitude of cash flow. In simpler terms, he thinks that an investor puts equity into the deal in order to convert the face value of it, as well as the cash flow that collateralizes it, from earned to passive. He and others believe that an investment of capital is the defining characteristic of “investment.” Related: The Book on Investing in Real Estate with No (and Low) Money Down I am not going to argue this point of view – his is the most bulletproof model. Liquidity is the mother of safety in many ways, and relative to this, a business has much more potential to generate meaningful cash flow than does real estate. Grant’s formula is one that many successful investors have used: Start a business. Grow it so it throws off a lot of cash. Take this cash, which happens to be rather highly taxed, and buy income-producing real property with it, which converts the face value of cash flow into a much lower-taxed real estate variety. And as Grant acknowledges, this cash flow is less but more stable, meaning that the equity it collateralizes is safer. Brilliant — and text-book effective. No argument at all! But is This the Only Way? How many out of 1,000 people who achieve some level of financial success via real estate do it Grant’s way? Perhaps one in a thousand? Sure, if you want to shoot for the stars, then look for way to model yourself after Grant. Follow the three steps outlined above. But I promise you, if you are starting out with nothing and want to retire with some element of dignity and cash flow that is a 100 multiple of that which your neighbors receive on their SSI checks, you don’t have to be one out of 1,000; you don’t have to be Grant Cardone. This is precisely what makes RE so good – you don’t have to be a genius! You just need to know a few things, and NMD by the way is quite helpful to most of us… Take Me for Example While my friends Brandon Turner, Serge Shukhat, and Brian Burke will definitely tell you that I am a genius — especially if you put a gun to their head  — I’m definitely not. I started out my college years intending to make money as a violinist, but this plan was interrupted when I was diagnosed with MS. My plan B… well, there was no plan B. There also was no income to speak of, considering I was making paychecks teaching kids at a preparatory department in a nearby college. I came into college with credits in advanced physics and calculus, and UC counsellors asked me why I bothered with music. I could be making so much more money going for a different degree. But I love music and was taught by my parents that if I do what I love, the money will come. Besides, I was better than the average Joe on the fiddle. So in spite of low income potential, I went for it. But as I mentioned, even that prospect of low income was taken off the table following my diagnosis. I am not a betting man; I like guaranteed returns, which is why I buy apartments. But if I were a betting man, I’d bet that 75% of you reading this are in somewhat of a similar situation. Well, here’s the thing. If you listen to Grant, you have no business investing in real estate. Why? Because the only way you can do it is NMD, and according to him, you’d be stupid to do it. According to Grant, you should either have the brains and the balls to create a business to facilitate investment in real estate, or go work for someone. I Disagree I started out with nothing. I had a spouse who believed in me and a capacity to think and learn, but that’s about it. I’ve built a portfolio of small to midsize multifamily units, which has allowed me not to work for a living. I am not rich (working on that), but I am not poor either. I have become an expert at creative finance and no money down because this was my only option. Today, as I write this, my partners and I are negotiating on a 90-unit. Maybe it’ll work out, in which case we’ll syndicate it, and maybe it won’t — that’s beside the point. Here are a few things to note: I had to work up to a point where a deal like this is even within the realm of possibilities. This wasn’t possible 4 years ago. It takes intellectual worth, you know what I’m saying? Guess what? It was the NMD deals that facilitated the learning. I have partners without whom I could not do this kind of a deal at this point. I need back-up. Both of these guys have more money and units than I do today (though this is not going to last). Both of them, I’d like to believe, take me seriously. Why? Because I’ve done a lot of things, and I’ve learned enough to not do even more things. They could be lying to me, but they tell me that I’m pretty smart. Guess what? I got “pretty smart” by doing nothing down deals. I’ve been using OPM for 8 years now, and if this deal comes through, I’ll be floating a PPM of $1,000,000+; I will raise $1M from investors who agree with my partners in thinking that I’m not stupid. Guess what? I got here by doing nothing down deals. Newbies, Listen Up! There is an important distinction I want you to wrap your heads around, and it is this: Nothing down is not the final destination. I don’t plan to retire carrying too much debt, and neither should you. However, NMD has been a stepping stone. For me, NMD has been the facilitator of critical mass in terms of both cash flow, balance sheet, and intellectual worth — and it absolutely can be for you as well! I am going to turn 40 in March. I have a portfolio (all bought with nothing down) that has allowed me to do vastly better financially than any music student I went to college with. It has allowed me not to work a job and instead to focus on learning RE. It has bought a margin of financial safety for my family, which is better than many (I’d say most) of my friends, even those earning high incomes! Related: How to Invest in Real Estate with No Money Down (4 Rules You NEED to Follow!) I get richer when I sleep, and it’s a nice feeling to know that my car payment is being made by my tenants. I love seeing my balance sheet going up by thousands of dollars every month. Amortization is a wonderful thing indeed! Even if I don’t make a dime of cash flow from any of the properties I currently own (as if), and if I never do another thing in RE, I am going to retire multimillionaire. Do I want to do it with the property I currently hold? No, probably not; I’ll trade up. But in concept, I am OK. My family is OK, and while I want more (and I’ll have more), I am OK. That’s a lot better than a violinist is supposed to be able to do. All of it was teed up by having the audacity to not listen Grant Cardone and go for it in the only way that I could: no money down. I am not a genius, and I am not special. If I can do it, you can do it. Appreciate and admire Grant Cardone. Listen to every last thing he has to say. But take him with a grain of salt as it relates to NMD. Done right, no money down works! Investors: What do you think? Is no money down truly “investing?” Is it a feasible way to build wealth?  Leave a comment below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

This post is for you guys who maybe have a few private lenders lined up or maybe have private lenders who are coming to you that want to do some work with you. Maybe you’ve even followed some of the advice that I have in my BiggerPockets book Raising Private Capital, because this book is about how to attract people who want to work with you and loan to you or invest with you or work with you in one way or another as either private lending partners or private investors in your business. (If not, check out the book in the BiggerPockets Bookstore.) But once you get these folks, how do you vet them and how do you decide which is the right private lender to work with for your business? How to Pick the Perfect Private Money Lender for Your Real Estate Deals Maybe you’ve got two or three different people. What can you do to pick or seek out the right private money lender for what you’re looking to set up in your business. Ask a lot of questions. The first thing you want to do is ask a lot of questions. Do NOT immediately start throwing deals at these people. Question #1: Oh, hey, Uncle Charlie wants to work with me and lend me money for my business. Let me immediately throw Uncle Charlie deals. Instead you need to ask: What is the source of the money? You need to ask this question because the source of the capital will in some ways dictate how you have to structure that deal. If they are taking their money from a self-directed IRA retirement account and they’re loaning it to you, then there are certain hoops that have to get jumped through with your self-directed IRA custodian. You might need to speak to that custodian. You might need to get some paperwork from that custodian. It will likely slow down their ability to close by several weeks to get that money released to you by their IRA custodian. There might be certain covenants and clauses in the loan docs that the IRA custodian is going to require. So if it’s an IRA, that’s one direction. Also, if it’s an IRA, there are some things that you can create there—win-win benefits for them and for you—that we’re going to talk about in the next section. Now another source could be, let’s say, you locate somebody in your network who owns their home free and clear. You’re able to show them that they could unlock that equity they have in their home and turn that equity loose in your business. They can do this to build their net worth, build their income, build their wealth by unlocking that equity in their house. So if the source is a home equity line of credit, you need to know that. The reason why you need to know that is that a home equity line of credit or even just a mortgage has a monthly payment. You, as the investor, need to make sure they’re making an income that’s enough to supplement and exceed the monthly payment they have to make to maintain that debt. If they’re investing with cash, here’s the cash conversation that comes up. If they say, listen, I’ve got $100,000 of cash that’s just sitting there in a CD that’s earning half a percent interest, you can pay them 8 percent interest. OK, that’s a great conversation. But you need to tell them, hey by the way, I’m going to be paying you 8 percent on your money, but you know that interest is taxable. You’re going to have to pay tax on the interest you make and declare to the IRS that’s interest you made on a loan. That’s not true for an IRA. It is, however, true for a home equity line of credit. But they still get to claim the interest that they had to pay for borrowing that money, so they only pay net tax on the spread that they make from what they borrowed the money for and what they’re loaning it to you for. But if they’re loaning you straight cash out of their own pocket, they will likely have to pay income tax to the IRS—however it calculates. They’re going to have to pay tax on that money. You need to disclose that to them. You don’t want any surprises about income tax. They would be very unhappy with you. The best real estate investors who work with private money folks are at the core educators, meaning you educate your private money investor who wants to work with you on why investing with you is amazing and also how investing with you works. Get that education yourself from BiggerPockets. Related: Hard Money vs. Private Money: What’s the Difference? Question #2: The next thing you want to talk to them about is: What are their goals? If you’ve got a private money person who’s looking to retire in two years versus a private money person who’s 30 years old but happens to have $100,000 in their IRA, those are two separate goals. I have also encountered people who want to invest full-time eventually. That’s a different goal. They might want to get an education from you. They might want to learn how to do what you do as part of them loaning to you. You might need to expose them to a bit of the nuts and bolts, walk them on the job site, and show them what you’re up to—all those things on a weekly or monthly basis—in exchange for them loaning to you. And maybe the interest rate doesn’t matter as much or what you’re going to pay them. The exposure that they get matters the most. This is why their goals matter. Try to know everything you can about where they want to go, their wealth goals, and their future life goals. Where do you want to be in five years? That’s the best way—you should ask that of everybody. If they don’t know, that’s a great conversation to have further, to help somebody discover that. Then through working with you, you can help them get where they want to go. Those goals can have things to do with money or with their life (like I want to be a full-time investor). Or maybe they love what they’re doing but want to save up for their kids, for college or something like that. I had an investor whose goal was to move back to Argentina. He was from there, moved to the U.S. for work, and because he did some investing with us, he was able to create a path to move back to Argentina eventually. This took like five years. It happened because he and I both knew what he wanted to do and because I asked that goals question. We evaluated what is income was through the turnkey investments he had made with us and through some of the private loans we had done. Today he’s back home in Argentina, where he grew up, and he’s making passive income off of investments he’s made in the States. Look to create a win-win situation. So once you’ve got your questions answered, the next thing you want to do to pick the right private lender is to make sure that they are on board for a win-win with you. You’ve got to win, too. You don’t want to work with somebody who’s out to get you. There are predatory lenders out there that pose as private money. You don’t want to work with those folks. Conversation #1: You want to discover just what the win-wins look like and enroll them in a win-win conversation. Win-wins might look like, if somebody’s got an IRA let’s say, maybe you can have the conversation about monthly payments. More specifically, if it’s an IRA, you don’t need to make monthly payments. How great would that be if you’re doing a fix and flip, well you’re not making any monthly payments during the life of the loan? You pay all the interest at the time the project’s complete. If they have an IRA, that money is not needed by them. They can’t do anything with it anyway, because it’s in the IRA. It’s just as fine for you to pay them all the money at the very end of the project versus during the life of the project. If their money source is real estate equity, they have to have monthly payments, because it’s not fiscally responsible for you to put them in a position where they’ve got to maintain that debt the whole time and make those monthly payments just so you don’t have to.  I would never ask somebody to do that. Then obviously if they have cash, they might want monthly payments, too, because it just increases their personal cash flow. They can touch the money, they can put it in their pocket and use it versus an IRA where they can’t do that. Related: 4 Risks and Drawbacks to Using Private Money Conversation #2: The next thing that you want to bring up is terms and rate. If you’ve got somebody who wants to give you hard money loan rates, like they want to charge you 15 percent interest plus three or four points (you know one point equals one percent of your loan amount), it’s not really a win-win. You have to pay that up front typically, so if you’re borrowing $100,000 and they want four points, that’s $4,000 you have to write to them at the day of closing as a profit line to them. There’s your points; here you go, Mr. Lender. And those points are due to them at closing regardless of how long the loan is. So if it’s a shorter loan, they actually make a better return on their investment, because they got their money back and they can go and charge those points again. Points in general are more of a hard money conversation. It’s less private money. So if you’ve got people who want to charge you a lot of points and a high interest rate, that’s not a win-win—unless you’re in a bind, unless you really need to do the deal fast. If it’s really, really a screaming hot deal and it still works at those rates and terms, fine. But I don’t like those types of terms as the standard moving forward, because it’s really not a win-win. Look carefully at the written terms and make sure that it’s a win-win for you. And what’s a win for them? A win for them brings them to their goals. So once you know their goals, you define the rest. If I didn’t know my investor wanted to go back to Argentina, I couldn’t define a win for him—that being carving a path for him getting back home. A win for me was to elevate and grow my business with favorable loan terms that I could use over and over again, knowing that capital was there for me. It was almost like a line of credit. As soon as I needed the money for a deal, he was able to produce it lickety-split for us to go and close. He was willing to buy projects we had that were ready for turnkey. It wasn’t “no questions asked”; he did his due diligence on it. But he was a ready, willing, and able buyer, so I knew that was a win for me. I was able to produce product to sell it to him as a turnkey or to produce some deal that he was willing to loan to me on. This was a great arrangement. The Bottom Line The bottom line is the way you vet a private lender is to ask lots of questions and make sure you structure win-wins. High interest rates and lots of points are not wins for you. Lots of hurdles for you to jump through, weeks or months it takes to get the closings are not wins for you. Watch my video above for more information and for a 20% off coupon to buy my book Raising Private Capital in the BiggerPockets Bookstore. Have you used this type of financing before? What’s been your experience? If not, what’s your motivation for doing so? Do you have any additional questions for me about the process?  Let’s talk in the comment section below.  Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

A common question I see on the forums is, How do I find a bank to lend to me? The answer should actually sound fairly familiar: You’ve got to pound the pavement. Here’s how! What Type of Bank Should You Look For The first thing to figure out is what type of loan or institution to pursue. One of the best ways to get started in buy-and-hold real estate is with an FHA loan or 203K loan. With these loans, you can get up to 96.5 percent of the property financed at a very good interest rate. The only problem is that these loans are only available to owner occupants. Luckily, you can buy anything up to a fourplex with it. So why not buy a fourplex, live in one unit, and rent the other units out? You’re also eligible for up to 10 Fannie Mae–backed loans. These loans have to be in your name and not that of an entity such as an LLC. However, they are easier to get than a standard bank loan if you have decent credit and income. Any mortgage broker worth their salt should be able to help you get one of these. After that, the best place to look is community banks. Large national banks are usually very conservative when it comes to smaller investors. They predominantly want to lend to large companies or homeowners. On the other hand, there are also some national lenders that focus on single-family investors — such as Lima One Capital and CoreFirst. These are worth looking into. They will generally have 30-year amortizations, but also more fees and a higher rate of interest than local banks. I would generally avoid hard-money lenders, as they are simply too expensive for holds. Even for flips, their fees and interest rates will eat up a lot of your profit. Therefore, in my opinion, community banks are your best bet. It’s easier to build a relationship with these banks. And because the loans you will be taking out from them are portfolio loans (they keep them in house and don’t sell them on the secondary market), you will usually be granted a bit more leeway than you’d get from the one-size-fits-all national banks. But where do you find these banks? Well, I’m glad you asked. Related: 7 Questions Real Estate Investors Should Ask When Selecting a Lender 1. Ask for Referrals If a bank has lent to another real estate investor who is doing what you are doing, then why wouldn’t it lend to you? At the very least, your odds are better. So the very first place to start, when looking for a bank, is to ask around. Start by asking any real estate investors that you know. Then, go to your local Real Estate Investor’s Association (REIA) meeting. Rub shoulders with other investors, and ask them who they are getting loans from. I’ve never met a single investor who was shy to answer this question. And there’s no reason to limit this question just to real estate investors. Be open about what you do. Always be asking for referrals, even if it’s unlikely that the person you’re asking will have some. I’ve been pleasantly surprised before. Or why not ask in the BiggerPockets forums? I’ve answered this question multiple times for people who are looking for Kansas City banks. If anything, this helps secure my relationships: These banks recognize that I’m driving business. So why wouldn’t successful investors tell you which banks are lending? 2. Target Your Networking While investors are great for bank leads, another place to look is by networking where bankers network. For example, I found one of our lenders at a CCIM conference, which is for people in commercial real estate — many of whom are bankers. Other places you could consider are the chamber of commerce, property management associations, and any sort of banker networking event you can find. Some banks sponsor events themselves, so these would be worth checking out too. Keep your eyes open and always be networking! 3. Don’t Be Afraid to Call Around Another thing you can do is good ole-fashioned cold calling. When I first got to Kansas City, I got a list of 30-or-so local banks and, I just went down the list one by one. I called every single bank and asked to speak to a lender. Then I just told them what I was looking for: “We buy single family houses and small multifamily properties throughout the metro area. We then fix them up and rent them out and are looking for a bank that’s willing to refinance those at 75 percent of their appraised value. Is this something you would be interested in?” This was back during the recession, so most just said no. But a few said yes. I would then set up a lunch and try to build some rapport while making sure we were on the same page. Then I would submit our documents and see what happened. Most of the time, it didn’t work. But we got a few lenders this way. And that was back when nobody was lending. It’s much easier today. Related: I Used Portfolio Lending to Transform My Business. Here’s How You Can, Too. 4. Target Your Calls The most creative way I’ve found to find banks is to actually search for which banks ones lending to people like you. The process goes like this: Login to ListSource, DataQuick, or any other data lists site. Search for properties with the following criteria: In the area you are looking in Owned by a non-owner occupant With a loan taken out in the past year (or purchased in the past year) In the price range you are looking to buy in Write down each bank which has made a loan to such individuals or companies, and give them a call. What’s great about this method is it drastically narrows your search in comparison to simply cold calling. Each bank on this list has made it abundantly clear that they are willing to lend to investors who buy in the area you’re buying in, at the price you’re looking to buy. So why wouldn’t they lend to you? I have found three different banks with this method and highly recommend it. Conclusion The most important thing is to get out there and start actively looking. Don’t get caught in the woe-is-me procrastination trap. There are plenty of banks out there willing to lend to investors, you just have to find them. After that, of course, you have to convince them to lend to you. But that’s the topic of another post; namely this one. Good luck! Have you had luck using local community banks? Share your experiences in the comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

When the time comes to step outside your comfort zone for a deal, it’s still a gut call. In their early days of making deals, I recommend new investors follow a script and make their deals contingent upon finding a buyer. In addition to experience, it helps to have numerous other sources of cash flow (my associates and I typically structure three paydays) coming in to be able to step outside the comfort zone and fund deals. This is the story of one of my more experienced associates, Bill, who was comfortable enough with the seller and the property in a certain instance to go outside his usual terms. Related: What to Do When a Deal Goes Sideways (Hint: Don’t Panic!) Straying From the Norm The property was an expired-listing townhouse in good condition and in a good neighborhood. The seller needed a firm commitment on a lease purchase commencement date from Bill in order to get financing for another home he was buying. He accepted that, but with a very spacious six-month term to find a tenant-buyer. Bill agreed that if he couldn’t find a tenant in six months, he’d start paying the underlying mortgage. The real estate agent had been unable to find a buyer on the market for $359,000, and Bill was able to tie it up for a lease purchase of $320,000. That was another reassurance; if he couldn’t find a tenant-buyer, he could sell it outright for at least that purchase price. To come to a deal took three buyer-seller meetings at the house, but once Bill started marketing with our proven funnel, there was a flurry of inquiries. Everyone asks us, “Well, if I get a property, how will I know I can sell it?” The buyer end is not the challenge, as somewhere between 60 to 82 percent of the buyer pool (depending on your area) cannot get financing. This makes your rent-to-own option extremely attractive—you’ll have plenty of buyers. Related: How Remaining Flexible Resulted in a $54,000 Profit Coming to Terms The tenant-buyer in this scenario had some financial issues. When he was pre-qualified, the mortgage-ready date suggested he would need 24 to 36 months, and the deal terms were right at 36 months on Bill’s buy side with the seller. This was risky, but as long as nothing tripped up the tenant-buyer, the deal could be closed. (If not, there are other options, but those are for another article.) To compensate for the risk, Bill insisted on a hefty down payment of roughly $40,000 with about $25,000 of that within the first few months and the other $15,000 over the next year. In the end, the risk was worth the reward of a $78,000 profit all three paydays. Another reward was that the sellers were happy, and the buyers gave Bill a big hug for helping them finally attain home ownership. Deal Structure Summary Lease-Purchase: $320,000 Sale Price: $369,900 Term: 36 months Principal Paydown: Payday #1: $40K down payment ($25K early, $15K first year) Payday #2: $9K ($250 x 36 spread) Payday #3: $28K (principal paydown and remainder of markup, less deposit down) Profit: $78,000 (just under Bill’s average of approximately $110,000 per deal all three paydays) What’s your level of comfort when it comes to straying from the norm in business?  Let’s talk in the comment section below!   Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

Years ago, I was trying to buy a piece of real estate. It was a triplex that needed a bit of work done to it, but the numbers were solid and I knew it would make a great deal. But I had a problem—I had no money. So I gave up, thinking it was impossible. Instead I sat on the couch watching reruns of Friends. Nah, not really. What I did was asked the right questions and was able to find a solution: a partnership.  Here I’ll explain how to use a partnership to invest in real estate using no money of your own.  Related: 5 Top Tips for Creating a Mutually Beneficial Real Estate Partnership How to Use a Partnership to Invest in Real Estate Using No Money of Your Own Finding a good partner to help fund a deal is one of the best ways to finance a piece of real estate. It’s also one that many investors without a lot of cash begin with. Partnerships work great because of something we call the “deal delta.” To put together a real estate deal, three things are required: Knowledge Hustle Money Playing to Your Strengths But here’s the thing—all three don’t need to be provided by YOU. Instead, partners can make up the difference for what you lack. For example, you might bring the hustle and the knowledge, but a partner can bring the money. Now you have all the parts needed for a deal to happen! So back to my story. This triplex came on the market in my area, and I immediately jumped at the opportunity. But I didn’t have any money, and I didn’t even have a W-2 job. In other words, I had no ability to fund the deal. This is where most people would simply give up. Alternatively, I asked myself the all-important question, “How do I get this deal done?” The answer I stumbled upon was to bring in a partner. I spoke with some friends of mine from church—of all places—who I had known for many years and knew shared an interest in real estate. This couple both worked stable, government jobs, had good income, and had excellent credit. What they didn’t have was TIME! They wanted to get into real estate but lacked the time (or “hustle”) needed to complete the deal delta. So, I proposed a solution. If they could come up with the $35,000 needed for the down payment, I would take care of the rest. I would bring the knowledge and the hustle; they would bring the cash. We’ve owned this deal now for almost six years, and each year we save up our cash flow until the end of the year, then split everything evenly—50/50. Splitting the Profits On average, we’ve each earned around $5,000 per year (that’s over $400 per month each) in profit from this deal. In addition, we now have about $100,000 in equity in the property, which someday we’ll split and likely turn into future (larger) deals. That is the power of a partnership when funding deals. And the cool thing is I did the deal for no money down. None. When I tell this story, there are two completely opposite responses I get: Why in the world would this partner agree to losing 50 percent when they are bringing all the money?! Why wouldn’t they just do it themselves and get 100%? Why would you, Brandon, be so generous to give someone 50 percent just for bringing the money? You found the deal, negotiated it, managed the rehab, and manage the property on a continual basis to make sure it produces a profit. They don’t have to do anything but write a check! Funny how those two responses are completely opposite from each other, and one’s response is based on their predefined opinions of what “value” is being brought. After all, I could not do the deal without their cash. They could not do the deal without my hustle and knowledge. To me, that’s a perfect partnership. So we split it 50/50. But it doesn’t have to be 50/50. Your partnership can be whatever you’ve defined it to be, based on how you and your partner view the value each party is bringing. Finally, keep in mind that a partnership is like a marriage. When it’s good, it’s REALLY good. But when it’s bad, it’s REALLY bad. So take the time needed to find and vet your potential partner. Don’t jump into bed with the first person who wants to work with you. Find someone who fits with your style, goals, and ambitions. ______________________________________________________________________________________ Real estate investing can be a powerful way to build wealth and achieve financial freedom. But knowing where to start is challenging. Unlike most real estate books, this one won’t tell you there’s “one secret path” to get there. Instead, it dives into dozens of real-life stories of successful investors. Pick up your copy from the BiggerPockets bookstore today! ______________________________________________________________________________________ Are you considering a partnership? What value are you bringing to the table? In what area(s) do you need some help? Let’s talk in the comment section below!   Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

To understand a reverse 1031 exchange, you should first make sure you know the ins and outs of a 1031 exchange. There are some key differences between a standard 1031 exchange and a reverse 1031 exchange, both of which are designed to defer taxes while investing in real estate. To learn more about what it is (and how it differs from a 1031 exchange), how to complete one, and how it can benefit you, read on. What is a Reverse 1031 Exchange? A reverse 1031 exchange is a tax deferment strategy that allows real estate investors to purchase a second investment property before selling their relinquished investment property—and importantly, defer capital gains taxes and other taxes that you would normally need to pay at sale of a property. Because a reverse 1031 exchange is more complicated than a standard 1031 exchange, it’s important to understand it fully before going forward. In a reverse 1031 exchange, the investor, also referred to as the taxpayer, first purchases a replacement property before selling the relinquished property (as opposed to a standard 1031 exchange where the order of operations is reversed). After purchasing the replacement property, you, the investor, have 45 days to designate up to three properties to sell. You then have 135 days from that point to get under contract and close on the relinquished property. Reverse 1031 exchanges are executed under the IRS’s safe harbor guidance of Revenue Procedure 2000-37, which states that you have a total of 180 days from the purchase of the replacement property to complete the full transaction. That may seem straightforward enough, but there are some additional hoops to jump through. You cannot hold the title of the replacement property yourself upon purchasing. The title must instead be held by an Exchange Accommodation Titleholder (EAT) to hold onto, or park, the title throughout the 1031 exchange process for tax purposes. You must also retain the services of a Qualified Intermediary. When the relinquished property is sold, only then can the Qualified Intermediary transfer the title of the relinquished property to the new buyer and the replacement property to you, the investor. Related: 4 Rules of 1031 Exchanges Every Investor Should Know Types of Reverse 1031 Exchanges There are two variations of reverse 1031 exchanges and they both have their benefits and disadvantages. Exchange Last In an exchange last reverse 1031 exchange, the EAT acquires the replacement property and holds/parks it until you sell the relinquished property. This is the most common type of reverse 1031 exchange. It’s preferred because it gives you more flexibility, but it can cause problems with your lender if they are concerned about the EAT holding the replacement property title. It’s important to speak to different lenders to find their stance on this reverse 1031 exchange structure. Exchange First In an exchange first reverse 1031 exchange, you acquire your replacement property first, your lender lends directly to you, and simultaneously you hand the title over to the EAT. While this will work for most lenders, you need to reinvest the total amount of equity in your relinquished property into your replacement property before the former sale closes; having this kind of cash on hand is rare. Benefits of a Reverse 1031 Exchange There’s no arguing that a reverse 1031 exchange is more complicated than a straightforward, standard 1031 exchange. So why would an investor choose to go this route? There are a few reasons. To secure a property. If you’re in a competitive market, you may want to secure the replacement property you have your eye on before someone else grabs it. To make sure you have a replacement property. If you have the means to purchase the replacement property first, that completely eliminates the risk of having to find a replacement property in just 45 days, as is the course of action in a 1031 exchange. To minimize tax liability risk. If you don’t sell the relinquished property within 180 days, then you shouldn’t have any tax liability, say registered investment advisors CWS Capital Partners. However, if you choose to do a standard 1031 exchange and sell the relinquished property but can’t close on a replacement property, then you would have a tax liability. 8 Steps to Perform a Reverse 1031 Exchange A reverse 1031 exchange is complicated, so while this will give you a solid overview of the process, it’s best to speak with your investment advisor and chosen Qualified Intermediary and EAT about the specifics of your situation. Find a replacement property. Make sure that your contract allows you to transfer the title to your chosen EAT, and let the title company know you’re participating in a reverse 1031 exchange. The replacement property must be equal to or greater in value than the relinquished property. Enter into a qualified exchange accommodation agreement. This is a written contract between you and your EAT laying out the terms of them holding title of your replacement property until you sell the relinquished property. The EAT acquires the title. Once you arrange financing, the EAT will acquire the title of the replacement property and park it for you. Designate the relinquished property. Once your EAT acquires the title of your replacement (now parked) property, you have 45 days to identify up to three properties to sell as the relinquished property. Optional: Lease the parked property. The EAT can lease you the parked property that they’re holding onto so you can control the property before the reverse 1031 exchange is completed. Find a buyer. Within 135 days of identifying your relinquished property, you must find a buyer and enter into contract with them for the property and close that sale. Enter into a new agreement with your Qualified Intermediary. This intermediary will transfer the title of the relinquished property to the new buyer and will gain the title to the replacement parked property. Hand over the deed to the relinquished property. The Qualified Intermediary will make sure that you give the deed of the relinquished property to the new buyer who will transfer the funds to the Qualified Intermediary. The Qualified Intermediary will use that money to acquire the parked property from your EAT. The EAT may use some of those funds to cover closing costs or other expenses. Get your deed. Finally, the EAT will hand the deed of the parked, replacement property to you. You’re done! Related: How a 1031 Exchange Can Make You Millions Costs of a Reverse 1031 Exchange There are several costs to be aware of when performing a reverse 1031 exchange. The EAT must report its ownership of the replacement property to the IRS, which will incur transaction costs. These costs include transfer fees, mortgage taxes, recording fees, lender charges, escrow and title fees, and legal fees, among others. Additionally, there will be an accommodation fee you must pay, which will vary based on the provider, the size and complexity of the exchange, and any other issues involved. You can expect to pay around $3,500, but it’s best to speak with a Qualified Intermediary about your specific situation to get an exact number. Risks and Considerations of a Reverse 1031 Exchange While there are certainly benefits to a reverse 1031 exchange, there is, of course, some risk as well. You may need to have liquid assets on hand. If you have liquid assets on hand to purchase the replacement property before selling the relinquished property, then this may not be a worry for you. However, if you don’t, you will need to get a loan for the replacement property. That itself can lead to risk if… The lender doesn’t approve the loan for your replacement property. Some lenders will not participate in an exchange in which an EAT will hold the title. It’s best to find this out before you begin the process. You can’t sell the relinquished property. If your property is in a slow market or there is little interest, you may not be able to enter into contract and close the sale within 135 days from designation. If this is the case, the exchange will fail. If you need to make improvements, you need to start right away. If you already know which property you will designate as the relinquished property and that property needs physical improvements via construction, you need to start right away. There are commonly delays in construction work and if the work goes past the 180th day, the construction manager will apply the percentage complete to your tax deferral. As with any big real estate investing decision, it’s crucial to plan out every step of your reverse 1031 exchange before you start due to the many steps and considerations involved. Have you ever used a reverse 1031 exchange? Any questions about the process? Leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

One of the biggest advantages to real estate investing is the ability to use OPM (other people’s money) to leverage your investments. That being said, it’s only an advantage if you can actually get a lender to approve your loan. So, what are the best ways you can improve your loan qualifications in a lender’s mind? Well, let’s break this down into its various components: Your Financials Your Experience Your Trustworthiness Your Coherence Your Financials If your debt-to-income ratio is 8,000 percent, it doesn’t matter how slick or charismatic you are. No one is going to loan you any money other than perhaps a Mafioso loan shark who hasn’t gotten a chance to break any knee caps for a while and is jonesing a bit. By the way, it is my recommendation and the position of BiggerPockets that you avoid borrowing money from Mafioso loan sharks. To start with, you need to look at your financials from a bird’s eye view. Create a personal financial statement with all of your assets and debts. Find your bad debts, which I define as any sort of consumer debt that wasn’t taken out to acquire an investment, then start paying that down. The only exception to this, in my opinion, are student loans. Those have such low interest rates that I would rather use my disposable money to invest than pay them down. The most important thing banks look at is your debt to income. And while it may not be easy to increase your income, you can definitely work on paying down your debts. Remember, to be an investor, you need to defer gratification and avoid frivolous expenses. Indeed, one banker told me that one of the reasons we were approved was that he noted how my dad drove relatively old, unremarkable cars. He used this as evidence that we would pay the bank back, as we don’t blow our money on flashy consumer crap. Related: 4 Ways to Find Private Money Lenders to Fund Your Real Estate Deals Also, run a credit report on yourself and evaluate any issues that come up. Remember, you can get one free credit report a year from places such as AnnualCreditReport.com. You may want to consult a credit counselor on how to improve your score if you have things such as foreclosures or bankruptcies on it. You can also  look over some of the ideas in this article. But a few quick points: You want some credit, so if you don’t have any debt or credit cards, you should probably get one. Buy your gas with the credit card or something like that and pay it off immediately. You also don’t want too many credit cards either, so keep it to just a few and close excess cards. Autopay is your friend. Try not to let anything get charged off if at all possible. Challenge anything that shouldn’t be there. Your Experience Banks would obviously rather lend to experienced individuals than inexperienced. But that doesn’t mean you’re out of luck if you have no experience in real estate. As Brandon Turner notes about the 5 Cs of a perfect loan proposal, one C is “Confidence” and another is “Creativity.” Put together an easy-to-read prospectus of your real estate investing experience for the lender to see. And if you don’t have any, put together a prospectus of your experience in other fields. Were you a well-to-do engineer? Talk about that. Did you get a 4.0 GPA in college? Make sure they know that. If you have a track record of success elsewhere, it can be assumed you will be successful in real estate. That being said, don’t worry if you don’t have much experience in real estate or another field. Many people come into real estate green. You can make up for that if your financials look good and you do the last two parts right. Your Trustworthiness If you think banking has become nothing more than some lender plugging numbers into a computer, then you are gravely mistaken. Banking is still a relationship business. When I submit a loan proposal, I try to make it so thorough that it blows the banker away. I want to include every document they want, as well as every other document they might want, as well as a bunch of other stuff that they didn’t even know they wanted. And I try to organize it an easily navigable Dropbox folder. In addition, you need to make a good impression with the lender. Take her out to lunch, and if you have one, show her your office and introduce your staff. Discuss your knowledge of the business and your strategy. If you have a property under contract, discuss why you think it’s a good deal. And let your passion for the business come through. Don’t just speak like some automoton that’s buying real estate because Joshua Dorkin told you to. Finally, ask questions about what they’re looking for in a loan and don’t be afraid to chit chat about whatever. Avoid false flattery, but there’s no reason not to make a friend with someone you want to be your advocate. I wrote an article on this very topic I recommend you check out, but to sum up the important part of it: “Remember, you are selling yourself to this person so that they will sell you to the committee. If you come off uninspired to her, in all likelihood she will come off as uninspired to the committee.” Related: Case Studies: How to Use Private Money in the Short-Term, Medium-Term & Long-Term Your Coherence OK, this one might sound strange, but it’s important nonetheless. What’s important to remember here is that a confused mind says “no.” This is especially true with private lenders or equity investors. If they can’t understand what your pitching, it doesn’t matter how good the deal is, they will say no. But it’s true with traditional lenders. If they don’t understand your strategy or why you’re doing what you’re doing, they will be hesitant. But more importantly, if they can’t understand your financials, even if you financials are good, they will say no. I can’t tell you how many times I’ve seen real estate investors, particularly the owners of small apartments or a few houses, who have a disaster for accounting. It’s par for the course as far as I can tell. These accountastrophes make it hard to evaluate the property and will lower the sales price. But they also make it very hard to obtain financing. Accounting is an often neglected part of real estate investment, but you need to make it a priority. Make sure you’re allocating expenses correctly and hiring qualified bookkeepers and accountants to keep your books in shape. Otherwise, lenders won’t be able to make sense of them and will likely say no. Not to mention the trouble you’ll have will buyers and potentially Uncle Sam. Conclusion The final advice I would offer is so simple it doesn’t merit discussion: Get a great deal. Great deals are always easier to finance than mediocre ones. But much of getting lenders to say yes involves the nitty gritty stuff—good accounting, networking, building relationships with lenders, putting together quality loan submissions, and cleaning up your credit and debt to income ratios. It takes time and energy, but it’s a critical skill to master for every real estate investor. Any advice you’d add to this article? How have you scored loans? Leave your comments below! Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

Real estate investors spend days, hours, weeks and months finding the next deal. Some get lucky and find their deal within the first few prospects but for others it make months viewing prospect after prospect to finally find The Deal. Now comes the second part of the real estate investment equation: Deal + Money = Investment Without money the real estate investment equation is incomplete. Real Estate Investors need to actively work on bringing in private money lenders to both tie up their deal and fund their real estate investment opportunities. (Before we get too deep in this post, we want to invite you to download our book “The Ultimate Beginner’s Guide to Real Estate Investing” which will help you build a solid foundation for your financial future. In other words – you are going to learn exactly how to get started building wealth with real estate! To get the book, just click here and join BiggerPockets, the free real estate investing social network!) What is a Private Money Lender? Definition: A private money lender is a non-institutional (non-bank) individual or company that loans money, generally secured by a note and deed of trust, for the purpose of funding a real estate transaction. Private money lenders are generally considered more relationship-based than hard money lenders. Check out the Web’s Largest Directory of Hard Money Lenders Right Now, For Free! Visit The BiggerPockets Hard Money Lender Directory! Why Private Money Lenders? One of the biggest mistakes that  new real estate investors make is that they spend an inordinate amount of time learning about finding and typing up deals but a small amount of time on how to raise equity capital from private money lenders. It’s just as important, if not more important, for real estate investors to understand the ins and outs of raising money as finding the deal. Finding a deal is great but if you do not have earnest money to tie up a deal or funds to purchase it, then all that time and effort is for nothing. (Ankit Investing Life Rules: Work Smarter Not Harder). When you make an offer on a piece of property, it is expected, and usually required, that you place a earnest money deposit down with your offer. If you are currently living paycheck-to-paycheck, coming up with even a few hundred dollars can be a big hurdle in launching your real estate investment business, let alone thousands needed for a purchase. Hence if you work on raising capital from private money lenders while locking up deals then you will have a greater chance for investment success. The goal of this post to help you learn how to raise capital from private money lenders so that you can successfully tie up and invest into real estate projects. The first question that most investors come up against is who  should I approach to raise the equity capital? Let’s try to answer that question Private Money Lender Circles Primary Circle: The primary investor circle is composed of Friends & Family. Many real estate entrepreneurs/investors (okay lets face it we are all investors whenever we raise capital for a  new investment) turn to friends and family for their first funding needs. Friends and family financing is popular because it is easy to get in front of these people who know you best and they are positively inclined to say yes. But there are negative parts of raising money from friends & family as  they may not be sophisticated enough to know what is a good deal and what is a bad deal and this can lead to problems when a deal goes sour. Hence  when you take funding from friends and family by very clear about the risks and downside. I would also suggest only taking capital from friends and family members who can afford to lose the investment. That way, if the investment does turn out to be bad, at least you won’t lose valuable relationships. In addition, friends and family often cannot come up with a lot of capital so friends and family can get you into business by providing you initial earnest deposit money so consider this source your angel investment  source of funds. The money from friends and family will  give you time to create value by locating and locking up  deals so that you can either raise additional money from this circle of investors or raise money from secondary and third party circle of investors. A really good BiggerPockets article that talks about how to raise money from your friends and family is Raising Private Capital: How I Raised $50,000 over Dinner by Arthur Garcia Secondary Circle: The best way to explain this circle of investors is to draw an analogy to LinkedIn Connections. When you login into your LinkedIn account and look up a person that is not your network then on the right hand side of the screen you will see how you are linked to that person from other people within your network. When you are linked to a person directly through one of your current network contacts then that is said to be a second connection. The secondary circle of investors consists of the Friends and Colleagues of your current primary circle (Hint: the bigger your primary circle then the bigger your secondary circle of investors; get out there and make more friends and contacts through the BiggerPockets Forums and other social networking groups). This is the second best source for raising capital compared to the third party circle as this group will be more receptive to listening to you given that you have been provided a nod of approval from your primary circle mutual contact. In addition, this circle is a bigger capital pool as there are more people in this group than in your primary circle which will allow you raise equity for your investment projects once you have locked up your deal using the primary circle’s capital. There are negative parts of working with this group as it is likely to take more time to raise money from this group as they are less positively inclined to say yes as they do not know you personally. To raise money from this group, you will need prepare to an investment presentation and spend time meeting these investors at luncheons, happy hours, and dinners. Learn how to raise money from your secondary circle through this great Biggerpocket Blog Post: How to Raise Money Anytime, Anywhere. Even over Chicken Wings by Clay Huber Third Party Circle: In your third party circle are investors that are most removed from your network as you don’t know them personally in any manner. This circle is the biggest capital pool that you can access but it takes the longest to convert them into capital partners. The key question that comes into the mind of real estate investors is how do I find these potential capital investor? To help bring clarity to this question, I will provide two ways on how to reach these potential investors: Investor Contact Sites: You can utilize websites such as BiggerPockets Marketplace, Lending Club, Prosper, Go Big Network or Lendpost to post your investment opportunity and actively contact potential third party capital investors. A Word of Caution: Please make your contact is within the confines of the Securities and Exchange Commission at both the federal and state level. Investor Direct Mail List: This a guerilla approach to getting in touch with potential capital investors wherein you work with a list broker such as Melissa Data and Click2Mail to ascertain a list of potential investors who match your pre-established criteria of Median Household Income, Net Worth, Likelihood to Invest, and Responsiveness to Direct Mail. Use this article as a guidepost as you work on raising equity dollars. Balance your  experience with your capital timeline needs as you consider who you should approach for your equity capital. I would love to hear your thoughts on how else you can approach private money lenders. Leave a comment, thought or suggestion below. Photo: John Althouse Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you

Should you get private money from your family and friends to invest in real estate? For some, it might make sense; for others, maybe not. Let’s talk about the pros and cons of working with your loved ones. And stick around until the end, when I’ll give you some quick tips and address some concerns about this topic. Pros of Getting Private Money From Friends & Family Members First, here are the pros of working with friends and family who may want to invest with you—whether that means immediate family members or just friends from high school or college. 1. They like you.  You have a rapport with them. They like you because you’re you. They know you and trust you. They don’t want to do this for you because you’re some juggernaut real estate investor (even if you are). You don’t have to go and prove yourself as an investor to them. 2. It’s a phenomenal way to build wealth.  What’s great about this is you get to share the gift of wealth building with people you actually care about. It’s a win-win arrangement! You’ll be motivated to create financial freedom for not only you but also them. 3. They are likely to refer you to someone else.  They’ll be eager to spread the word about you to their friends, neighbors, and so on after the deal goes well. Friends and family are great referral partners. Related: To Partner or Not to Partner…That is the Question! Cons of Getting Private Money From Friends & Family Members Now for the cons. Here are some reasons you might not want to get involved with friends and family when it comes to doing business. 1. The deal could potentially go wrong.  What if things go wrong? I can imagine the fear of this. It would be awful to lose lots of money that belonged to someone close to you. But I have an answer for this. We’ll talk about it in a bit. 2. You may be tempted to forgo paperwork.  It’s very important to still have all of the necessary paperwork drawn up and signed by all parties. Just because someone is your friend doesn’t mean it’s okay to skip this step. I’ve seen it go sour (as I mentioned in the video with the friend who leased to another friend—or more accurately, former friend—without a proper lease in place). My own mom lends me money for my business, and guess what? We still sign paperwork. 3. They might not even want to know about the deal.  This might seem like a good thing. You don’t even have to bother explaining to Aunt Sally about the deal. Or your brother doesn’t even want to know what the money’s for. He trusts you and wants to help. It’s not okay for the lending party to not understand what they’re getting into. How to Deal With the Cons of Borrowing Money From Friends & Family This is how you need to view working with friends and family in general. When it comes to the paperwork, do it! Don’t ever not do loan agreements or property equity agreements—no matter what the lender might say or who the lender is. Just do it anyway. In terms of them not understanding the deal, it is your duty to explain it to them. That is part of your role in this transaction. They have to understand what they’re getting themselves into, including timelines and when they’re going to get their money back. And finally, the “what if it goes wrong” thing. Do not do sketchy deals—ever. Underwrite super conservatively, and don’t go after lean deals that will only work if everything goes right. Do this with friends and family and all the other partners you have throughout your investing career. Build in room to fail. Then the failure can come out of your profit versus their pocket. Always ensure you’re doing deals that have padding in them. Most importantly, believe in your business! If you don’t think you can bring friends and family into your business comfortably, there’s something wrong there. You need to take another look at everything. Have you ever done business with friends or family? How did it go? Are you considering it? Why or why not? Let me know in a comment below!   Free eBook from BiggerPockets! Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks, and techniques delivered straight to your inbox twice weekly! Actionable Advice for Getting Started, Discover the 10 Most Lucrative Real Estate Niches, Learn how to get started with or without money, Explore Real-Life Strategies for Building Wealth, And a LOT more Sign up below to download the eBook for FREE today! Click Here to Download the eBook Now! We hate spam just as much as you