Investing in Real Estate without Being a Landlord
Okay, if you are reading this post, you’ve more than likely thought about investing in real estate.I’ll even go one further, I bet most of you still haven’t made your first investment.
Maybe the idea of buying a fixer-upper is a little overwhelming because you know nothing about home remodeling or repairs. For some it’s just procrastination, I mean you live near a great rental market that still has cash flow positive deals, but something always seems to get the way. For others the idea of being landlord sounds like too much of a hassle.Maybe you just can’t find the perfect deal or the prices where you live are so high you can’t find a deal that will provide positive cash flow to support the investment.
I’ve got great news: you can still invest in single-family houses without living in a place that has properties that provide cash flow. You don’t have worry about finding the perfect deal or worry if your “partners” are leading you in the wrong direction. You never have to pick up a hammer or a paint brush, or even know someone that can. And best of all, you never have to deal with the headaches of being a landlord, especially an out-of-state landlord.
Here’s how you do it, professional real estate investors all over the country are looking to partner with private lenders. Do you have cash sitting in the bank making less than 1% in interest? How about a forgotten 401k account or perhaps you want to get out of the stock market and invest in something that you understand and have more control over. Using cash or a self-directed retirement account, you can make loans to knowledgeable, professional real estate investors that need short-term access to cash for investment purposes.
Cash flowing real estate is the ultimate security for your capital. Barring a major catastrophe, the value of well-located single family home won’t go to zero because people always need a clean, well-maintained, safe and affordable place to live. I bet the owners of Bear Stern, Enron, GM and AIG wish they had that kind of security with their investments.
So how does it work? I’ll use my company as an example. We often partner with passive investors that want to be part of a deal without involving themselves in the details of a real estate deal. If the investor needs to roll-over a retirement account to make the loans, we normally connect them with our preferred self-directed custodian. If they have cash, we skip that step and get right into the mechanics of the deal. First, we only borrow from one private lender for each house (our one house, one lender policy). This makes things less confusing for all parties.Second, we provide all the project details to our prospective lender including, pro forma, exit strategy, property description, inspection report and a property appraisal. This allows our lender to do a complete due diligence on the project.
If the private lender is comfortable and wants to do the deal, everything is done through our closing attorney. We typically borrow 80% of the after repair value of the home and the private lender gets a note with a 60 month maturity that pays 8% interest annually. At the end of the 60 months, the principal of the loan is due in a balloon payment. In addition to the note, the lender receives a first lien position on the property and an assignment of rents if the note is note is not paid. Basically, we pay interest every month or the lender gets the house and the rents.
So let’s do the math, a $50,000 loan at 8% interest would translate into a monthly payment to the lender of $333.33 per month. Assuming the note isn’t paid off before it matures after 60 months, the lender would have received $20,000 in interest payments and would be paid the original principal of the loan, $50,000.
Becoming a private lender is the ultimate passive approach to real estate investing.
About the author: Steve Marshall is a franchisee of HomeVestors in the Memphis area. His email address is [email protected]