How does funding$$ work?

Question

Question I have regarding the transaction and use of funding.

I’m looking to buy distressed single family properties, fix and/or buy hold or sell.

Most of theses homes banks will not fund due to the work they need. So I need have either private/portfolio/hard money funding.

So if and when I find a lender willing to work with me how does the funding work?

Do we open a joint bank account?

Do they put money into my back account and then I go find a property?

Who’s name is on the lease?

Are we both co-signers?

James Wise · Answer

The issue with new investors & small loan amounts is a multi angle problem.

• With a new investor you have a higher fail rate. You are unproven. Considering most businesses fail in the USA odds are better that you'll fail than succeed.
• Collection. If the property & loan is small the cost to collect on an unpaid debt is a much higher % of the total debt. The smaller the loan the less it's worth to the lender to deal with the hassle of collecting said debt.
• Cheaper the properties are the more likely the neighborhood has a lot of blight. That can be an issue.
• If the new investor needs such a small amount of money that shows the lender their level of financial expertise. Who do you think is more financially savvy someone with $300,000 in the bank or someone who needs a lender to put together a $50,000 deal? See the rub?

For an investor to be an attractive option to a lender you need to present yourself as a low risk investment to them. That's all you are to them. A way to earn a return on their money. If there is a high fear that they could loose money it's gonna be a no go.

Nicholas Covington · Answer

@Hudson Walker

Any sort of lender is normally going to want the home as collateral to lend you money. You will apply with them, normally when you find a home. You will open up title and you will be the personal gurantor but they will place a lien on the home to collect should you stop making payments. At the closing table they will provide the funds to the seller/owner of the home.

If you are getting rehab funding, they might provide you the funds directly but I would like to believe that the funds would be placed in an escrow account and paid directly to the GC or you should you need reimbursment for fronting the rehab costs upfront. Most will not give you the money directly as this is risky.

LuAnn Leighton · Answer

@Damaso, thank you for your feedback.  I am new to REI and am trying to determine the best way to start with limited financial resources.  My initial thoughts were to run with wholesaling and save the cash earned for future investments and in parallel using hard money lending to purchase a home to flip so that the cash gained is saved for future REI (rental properties, etc).

Thanks, LuAnn

Damaso Bautista · Answer

@James Wise

Great post James!

I wish new investors would take time to establish their own personal finances before trying to navigate the complicated world of real estate investing.

At minimum I would advise new investors to have the following:

1. High paying W-2

2. High credit score

3. Savings enough for down payment and rehab

Once they have a solid base then tackling investment properties is manageable.

Just my 2 cents!

Tiwanna Wallace-Agbenyegah · Answer

Thanks for explaining the concept to me in great detail.  I guess I'll need to buy more properties using cash, in order to build up my experience.

Tiwanna Wallace-Agbenyegah · Answer

@James Wise I’m new to investing as well.  I just bought my first property for 52k, listed for 67,900, with cash.  However, I tried a private money lender first and because it was a move-in ready home, he declined.  Stated that I would need to borrow at least 75k for him to work with me.  Are there any private money lenders that would work with new investors needing less than 75k?

James Wise · Answer

You are putting the cart before the horse here. You are far too green to be thinking about taking on private money. Not trying to pee in your cheerios here but someone would have to be nuts to invest money with you at this stage. What you need to do is focus your attention on learning the business and stacking cash so that you can do a deal on your own. Then you need to repeat that process a few times. Never attempt to bring on private money before you are ready. A. it's a waste your time & B. you're probably gonna screw it all up & burn yourself some bridges that could have been very important down the road.

• Learn the biz
• Master the biz
• Then scale the biz

How does funding$$ work?

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