So I am a 20 year old college student excited about my future of real estate investing...but I'm not good at sticking on the sidelines. I am working to analyze 5 properties per morning, but need some help. I work for 9.75/hour about 15 hours a week because I am a full time student. I am wondering if I had the down payment and closing costs, and all initial expenses, is it at all realistic that I would ever get prequalified for a 80-120k mortgage, if the numbers made sense? I find (according to what I'm learning on BP) some good deals, but according to some "affordability" calculators, feel that I'm never going to get the loan from the bank. What are my financing options? Am I wrong about the bank? Help.
I'm not a banker. I would stick to the #s! Here is what I would do in your case.
- If I find a truly good deal, finding the funds is a lot easier. First, I would use the BP database and ask for investors looking to partner up or fund your project with a nice return on the loan (10-12% annually).
- If that doesn't work, I always have a backup list of family and friends that I could ask. I do not treat this as a "favor"; it is a business transaction. I would lay down my risk analysis, purchase price (MAO), repair value (RV), and current market value of the finished product (ARV). I don't find a need to show the profit margin. Then, if they agree to help, I have my silent/private investors ready and able to fund the deal. All I would need is a Letter of Intent and Proof of Funds from every private investor to put in along with my offer. (I would definitely recommend a real estate agent, they don't cost a penny to the buyer.)
- Finally, if all fails, I start looking for a hard-money lender. These are private companies/individuals set up as a company to lend out cash, fast, at high interest rates (10-15% annually on avg.) with a minimum of X months of interest to be paid regardless of how quickly you flip and sell the home. Some may require for me to put some "skin in the game" by paying for a percentage of the purchase price. I read up on every hard-money lender that I call prior to any deals. I make sure I know exactly who I'm "going into bed with", as they say. lol
Honestly, there are many other strategies that can work, but these have worked for me in the past and have yet to fail me.
As an exit strategy, I usually have a list of local investors from "We Buy Houses" bandit signs, etc. I call them up and see if they are willing to pay for a deal, either a "finder's fee" or a percentage from the profits. After building report with these investors, you may have access to hundreds of possible deals in your future.
I hope this helps, good luck!
Thanks Elvis that helps a lot! So just to clarify, if the numbers make sense and someone is willing to go in on a deal with me, they have to show proof of Funds and letter of intent, and I take that to the lender and say "look this guy has the money and is partnering with me" and if it makes sense they will accept that? Thank you for the time you took on your post.
Another question is how do I set up that interest payback to the investor, and how do I pay that out to them? On a per month basis according to the agreed upon interest rate? Let me know if I need to clarify... thank you!
Sure thing, Ricky.
To me, the numbers "make sense" when the deal has a minimum of $20k net profit margin.
In your statement, I'm not sure what you mean by "the lender". In your case, the lender is the private lender/silent partner. When you deal with a private lender/silent partner, they will need a contract (private mortgage), which you don't need to worry about writing because that is why we utilize the help of a good real estate attorney. All you need to bring to your attorney is the purchase contract* and letter of intent**.
As far as "they will accept that" goes, I'm not sure if you are referring to the sellers or the lenders. I am going to assume you are talking about the lender. Once you have come up with the #s, (ARV, MAO, RC, etc.) you will need to show that your numbers make sense and that you can assure that someone investing in this house will come out profitable, no matter what. You can watch videos on BP on how to calculate the #s.
Interest payback. This is taken care of within the loan mortgage agreement between you and the lender. Some lenders require you to pay an upfront cost (skin in the game), and a monthly fee, on the other hand, some do not require you to pay monthly because the full payment will occur at the time of the closing. Once you close, your attorney will pay the mortgage, liens (if any), real estate agents, taxes (sales and conveyance), and attorney's fees. What ever is left over will come to you. I suggest you look for a good accountant to help teach you how to manage your documents and paperwork, making tax season an easy experience instead of a hectic one.
Tip: Buy Quickbooks and learn how to use it. OR, buy Excel, and document all the expenses and transactions you make in relatable categories.
I hope this helps.
*Usually real estate agents are used to buy and sell homes on the market. I strongly suggest you utilize this FREE service when it comes to looking for homes to BUY. Shop around for an experienced agent that does not mind the type of work your looking to do. An investor tend ti put in 100 "low-ball" offers and maybe buy 1 or 2 at the end. Some agents hate that, which is why it is important you are upfront with the agents on what type of business you are trying to accomplish. When you sell a home, I also suggest you throw it on the market (MLS). I know you may see the 4-6% commission that goes to the brokers as a loss, but I actually see it as an investment. When you list a home, you have hundreds of other real estate agents showing your house to homebuyers for FREE. The only agent that gets paid is the one who brings you a buyer. You may have good luck selling this on your own as "For Sale By Owner", but you are giving up a lot of credibility that way. Many of my past clients prefer to pay for a professional to find a house, rather than buy it from "a guy down the street".
**Usually, hard-money lenders have their own contracts, which you would ask your attorney to comb through and make sure you understand what you are signing. When you are dealing with family/friends, a letter of intent is given to you once they agree to help you. This is usually written by an attorney, in which case you need to include the lending period, the interest rate, a minimum interest due (early-payment penalties, if any), and the loan amount. You can find examples online if needed.
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