SKIN IN THE GAME

Creative Real Estate Financing
12yFollow

SKIN IN THE GAME

Karen MargraveBusiness Member
Moderator
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes

If you were just starting out, and didn't have enough money for a down payment, how would you get a deal going?

I know many of you are cash buyers in lower priced markets. However; if you do finance your deals, how much skin in the game do your lenders require? Where do you get that from?

These questions are asked everyday by new investors, usually under the heading of private money, or starting out. I thought maybe some of you have some creative ways you've done it, and ended up with 100% financing, do you want to share?

As builders we have years of experience and deals behind us, and have often put deals together that are 100% financing. However; LTV's are much lower on new construction, plus all the things we bring to the table in the way of skills, etc., and the fact we've completed every deal we've started helps.

For new investors do you have any ideas to get them going?

3Reply
13 views

Most Popular Reply

Brie SchmidtBusiness Member
Moderator
Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
12y

@Taylor Shapiro - the first 12k bought us a 300k property (3.5% down FHA). We lived in 1 unit and rented out the other 2. Those units covered our mortgage and we had a small profit of about $500 each month - so we lived for free. We stuck to the same tight budget we had initially, living off an allowance each week and not indulging in expensive things. We both work corporate jobs and make a decent living but we essentially live off 1 salary and save the other

After a year of banking everything (1 salary + $500 rental income/mo) we had enough for 25% down on another investment property. We made a really smart choice in that property and it has great CF. At this point we had 6 units and were living in one (free) and profiting about $2,500 a month. So we continued to save our personal income by living on a budget and adding the $2,500 profit from rentals until we had enough to buy another property in about 6 months. This was a OO 2 flat that we converted to a SFH with 20% down. We bought way under market value and did a complete renovation. If my estimates are right as far as the appraisal we will be able to cash out refi on the equity and have enough for a DP on 1 - 2 more.

So if all goes according to plan we will have about 2M in property within 3 years of buying our first. It is not always easy, it takes discipline. I have to remind my husband often that we cannot always buy the things we want if we want to retire by 45 and it takes self control to not spend money casually.

Podcast Guest on Show #132
Second City Real Estate4.821 Reviews
WebsiteView Page
5Reply
See this reply in the discussion

29 Replies

Jump to latestLatest
  • Greg B.
    Investor · Syracuse, NY · Member since 2014 · 170 posts · 73 votes
    12y

    I hear the term "skin in the game" a lot but what some think of as being invested might not be the same as someone else.

    Some lenders will ignore a beginning investor if the investor only had like $1000 invested in a $150k deal. They will look at it as the newbie has nothing invested, nothing to lose. BUT this newbie who's working a low paying job and it took him 9 months to save that $1k. Too me he has a ton invested in the project. Simply because an individual might not have what others my consider skin he/she might be taking a big chance putting EVERYTHING into a deal and losing that minimal amount of cash is disastrous for some of us.

    I'd fear going into a deal with a person with a ton of money who can handle a hit. No one likes to lose money but its easier to lose when you have more in reserves. Some newbies are simply looking for a break, that one opportunity to get started. It's necessary to have something in the deal, nothing should be free, but give us poor saps a shot. Ok, I'm done lol

    1Reply
  • Bill Jacobsen
    Salem, OR · Member since 2013 · 701 posts · 159 votes
    12y

    I started with an $80,000 loan from my Mother. I doubt she will loan you any.

    Some do start with funds from family or friends who believe in them. You also may have HELOC's. Also look at seller financing.

    I have only done one transaction where I didn't need any money. I closed at 3 o'clock and the next buyer closed at 4 o'clock.

    Good Luck.

    Bill

    0Reply
  • Joshua McGinnis
    Rental Property Investor · Beverly Hills, CA · Member since 2014 · 472 posts · 272 votes
    12y

    My first down payment was funded through savings, cashing out some stock, and doing work on the side as a consultant.

    When I first started the job I was in at the time, they offered me some stock as part of my benefits package. The RSU's (restricted stock units) became available after 2 years of work and I started cashing some of them in. That contributed a big part of the down payment and about $10K towards repairs.

    At the time, the stars aligned such that we were getting additional monies from all over the place. Both my wife and I were working, we had stock, and I was able to bring in about $30K extra in just a few months of doing software and web dev consulting.

    They key thing for us was to not change our lifestyle by going out and ramping up our spending. We knew we wanted to invest in real estate so we saved it all and planned the best way to get a return with the funds we had.

    2Reply
  • Aaron Junck
    Real Estate Investor · Sioux Falls, SD · Member since 2013 · 415 posts · 84 votes
    12y

    Great job @Joshua McGinnis ! I am glad to see a post where someone says once they started making more money they didn't increase their quality of life. It drives me up the wall when so many people complain where they are in life and how so many other people have it so well, while in the meantime they aren't saving or investing, however they always seem to have a new vehicle, clothes, and are always posting pics on Facebook of what event they attended that weekend!

    Its all about priorities!!!

    2Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y

    Without money or previous history, a newbie has the best chance of funding a deal through a family member or someone close to them who believes in them. Obviously, education in the strategy you intend to use is of vital pittance, no one should ever jump in without at least that.

    My very first investment in RE (other than my primary residence) was a buy and hold as were the next several - 6 or so more - and they each were purchased with zero dollars from my pocket, 100% from a private investor (my parents were my first private investors) and the first buy and holds all had a 50% ownership split. I made many mistakes on my first purchases as most will do at the start. After that, I started spec building and land development, I had no previous experience in it but I was successful at it and all of those deals were done with zero money of my own. I used private money and other peoples credit (even though I did have good credit, I did not need to use it). You can leverage OPM (other people's money) and OPC (other people's credit).

    As a beginner, I recommend you learn all you can on your strategy and then on how to raise and structure funding. Some of this can be learned on BP, some from reading books, and from speaking to others who have done it. A good place to find them is at RE club events. Network, network, and network. Next, apply what you have learned and go out there and do it. Fear will always be there, those that act in spite of fear as those who succeed.

    Podcast Guest on Show #130
    1Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    12y

    I started with 12k in savings from living on a budget and saving. We used that to get a FHA loan with 3.5% down on a OO 3 flat in Chicago for 300k. 2 years later we have 1.2M in property and looking to get to 2M in 2014. And we still live on the same budget we had when we started

    Podcast Guest on Show #132
    Second City Real Estate4.821 Reviews
    WebsiteView Page
    4Reply
  • Mike Bryant
    Real Estate Professional · Lees Summit, MO · Member since 2013 · 57 posts · 21 votes
    12y

    Hi @Karen Margrave

    @Karen Margrave

    @Karen Margrave

    0Reply
  • Taylor Shapiro
    Flipper/Rehabber · West Hartford, CT · Member since 2013 · 128 posts · 52 votes
    12y

    @Brie Schmidt congrats on your accomplishments. If you don't mind, what was your strategy in going from 300K to 1.2M with an initial investment of only 12K?

    0Reply
  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    12y

    I used to have cable TV, several magazine subscriptions, etc. Then I went through a period of my life where I had to cut everything.

    And I haven't gone back. I was able to save much more money. That definitely helped me get a jump start.

    Podcast Guest on Show #29
    2Reply
  • Karen MargraveBusiness Member
    Moderator
    OP
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    12y

    Great answers. I love reading stories of how everyone got started, and I know new investors are hungry for the information. There was a thread on private money yesterday where someone was looking for this info, but it wasn't getting a lot of traction, so I wanted to get this going. Keep those stories coming!

    When the market crashed we were hit really hard, being in the middle of a spec subdivision and 2 commercial buildings. We used all of our assets to pay off investors and relocate. We have been rebuilding ourselves. I can totally relate to how hard it is to get going again, though we do have a few advantages over completely green investors.

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    12y

    @Taylor Shapiro - the first 12k bought us a 300k property (3.5% down FHA). We lived in 1 unit and rented out the other 2. Those units covered our mortgage and we had a small profit of about $500 each month - so we lived for free. We stuck to the same tight budget we had initially, living off an allowance each week and not indulging in expensive things. We both work corporate jobs and make a decent living but we essentially live off 1 salary and save the other

    After a year of banking everything (1 salary + $500 rental income/mo) we had enough for 25% down on another investment property. We made a really smart choice in that property and it has great CF. At this point we had 6 units and were living in one (free) and profiting about $2,500 a month. So we continued to save our personal income by living on a budget and adding the $2,500 profit from rentals until we had enough to buy another property in about 6 months. This was a OO 2 flat that we converted to a SFH with 20% down. We bought way under market value and did a complete renovation. If my estimates are right as far as the appraisal we will be able to cash out refi on the equity and have enough for a DP on 1 - 2 more.

    So if all goes according to plan we will have about 2M in property within 3 years of buying our first. It is not always easy, it takes discipline. I have to remind my husband often that we cannot always buy the things we want if we want to retire by 45 and it takes self control to not spend money casually.

    Podcast Guest on Show #132
    Second City Real Estate4.821 Reviews
    WebsiteView Page
    5Reply
  • Mike Bryant
    Real Estate Professional · Lees Summit, MO · Member since 2013 · 57 posts · 21 votes
    12y

    Wow @Brie Schmidt that is very inspiring story. That would make a great blog article. So many newbies who are trying to figure out what to do / not to do. Your story of self-discipline needs to be seen and heard by the masses!! Well done!!

    0Reply
  • Chris Marroquin
    Austin, TX · Member since 2013 · 16 posts · 5 votes
    12y

    Just FYI, rule of thumb for "hard money" is ~ 6-10% of the loan amount on deals that have acquisition and repair within the 70% of the ARV.

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    12y

    Thanks @Mike Bryant - my husband doesn't like the self discipline all the time but I really think he will be thanking me 10 years from now.

    Podcast Guest on Show #132
    Second City Real Estate4.821 Reviews
    WebsiteView Page
    0Reply
  • Taylor Shapiro
    Flipper/Rehabber · West Hartford, CT · Member since 2013 · 128 posts · 52 votes
    12y

    Thanks for sharing @Brie Schmidt. Keep up the great work!

    0Reply
  • Taylor Shapiro
    Flipper/Rehabber · West Hartford, CT · Member since 2013 · 128 posts · 52 votes
    12y

    @Karen Margrave, I can't help but admire your (and others) perseverance in picking yourself up and continuing forward after a major setback. Just wanted to congratulate you for continuing on.

    1Reply
  • Karen MargraveBusiness Member
    Moderator
    OP
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    12y

    @Taylor Shapiro The country is filled with contractors and others that were in the building and real estate trades that were hard hit, and gave up. Luckily for us we had enough experience, a few lenders left that hadn't closed up shop, and were able to relocate and start up business in a better area. It's been a challenge, but things are looking pretty good. The biggest thing is this area is much more expensive to build in, and finding funding for the higher range is tough, though we are looking at joint venturing as others have mentioned. There's solid profits in southern California, with more qualified buyers, and a great economy (only 5% unemployment and going down)

    0Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y

    Back in the day I used hard money lenders who required no skin in the game. They were pure equity lenders. They did their own appraisals and loaned 70%, 3-5 points, 12-18%. You could even get cash at closing if you were buying right. I usually resold immediately, and a couple of times I refinanced. But there were buy-and-hold investors in my area who could make that money work longer term.

    If you had seller that was willing to carry 90 or 95% back with a small down, you could even get the HMLs to lend you the down, as long as they could be in first position and you could negotiate a subordination from the seller. That kind of equity lending is pretty much a thing of the past, I'd say.

    I once used my remaining available balances on 3 different credit cards to buy a tax sale property (who knew the tax collector would take credit cards and split up the purchase price).

    I was just going over a possible purchase this morning. It's for a rehab property. But I think I'd make more money selling it to the rehabbers in my farm that are hungry for inventory and will do a rehab for thinner margins than I will. I'm contemplating using 100% transactional funding on that one. Two contracts, two escrows, with a lender getting their points at close.

    Guess it matters what kind of "deal" it is. I've bought lots of properties with no cash out of pocket and made money on them, so they were deals to me.: ) But the majority of this thread suggests that people save money, use their personal credit and borrow from family. Inspiring stories to be sure, but probably not that helpful to someone just beginning without any of those resources. To them I would say to really really learn value for your area and network like crazy so that you can borrow and partner when you find a deal. I wish I had done a lot more of that when I started.

    1Reply
  • Karen MargraveBusiness Member
    Moderator
    OP
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    12y

    Thus far we have:

    • Scrimp and Save
    • Borrow from friends/family
    • Find Joint Venture partners
    • Use credit cards
    • Get out and network to meet potential lenders, partners, etc.
    • Real Estate Commissions (if you're a licensed agent)

    Anything more creative?

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
    12y

    Creative Finance is a key to people that are rookies.

    Pretend you are bankrupt with a 550 score.

    Get away from needing down payments money, get toward finding a way to -

    - Cash or Terms (give low cash offer)

    - Use Lease Options, Sub2, Installment Land Contracts, Wraps - AITDs, Private First Mortgages (free and clear) to get the solution without banks.

    - Use IRA Private Lenders and Joint Venture Partners. Wholesalers should consider JVing with the Seller.

    If you had a $500K house, $50K work needed, free and clear.

    Most sellers will reject most WE BUY HOUSES offers. Why? The seller loses too much.

    What if you offered to JV with the seller, bring in $50K of work, $20K profit, $70K in the deal.

    Do the work, resell the house with an agent for $485,000, subtract the $70K, subtract sales costs.

    Protect your $70K with a note - mortgage or note Deed of Trust.

    Not all the time this works, but if you have a gorgeous house, you JV with the seller, you secure the debt and your profit upfront, you don't have to convey title, no purchase closing costs, no carrying costs, and you get your $70K when it sells.

    You might need to check with an attorney to protect your JV interests.

    But isnt that better than wholesaling? :)

    4Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    12y
    Originally posted by @Karen Margrave:
    Thus far we have:
    • Scrimp and Save
    • Borrow from friends/family
    • Find Joint Venture partners
    • Use credit cards
    • Get out and network to meet potential lenders, partners, etc.
    • Real Estate Commissions (if you're a licensed agent)

    Anything more creative?

    Don't forget seller carryback loans, sub2, lease options, etc.

    Podcast Guest on Show #130
    1Reply
  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    12y
    Originally posted by @Brian Gibbons:
    Creative Finance is a key to people that are rookies.

    Pretend you are bankrupt with a 550 score.

    Get away from needing down payments money, get toward finding a way to -

    - Cash or Terms (give low cash offer)

    - Use Lease Options, Sub2, Installment Land Contracts, Wraps - AITDs, Private First Mortgages (free and clear) to get the solution without banks.

    - Use IRA Private Lenders and Joint Venture Partners. Wholesalers should consider JVing with the Seller.

    If you had a $500K house, $50K work needed, free and clear.

    Most sellers will reject most WE BUY HOUSES offers. Why? The seller loses too much.

    What if you offered to JV with the seller, bring in $50K of work, $20K profit, $70K in the deal.

    Do the work, resell the house with an agent for $485,000, subtract the $70K, subtract sales costs.

    Protect your $70K with a note - mortgage or note Deed of Trust.

    Not all the time this works, but if you have a gorgeous house, you JV with the seller, you secure the debt and your profit upfront, you don't have to convey title, no purchase closing costs, no carrying costs, and you get your $70K when it sells.

    You might need to check with an attorney to protect your JV interests.

    But isnt that better than wholesaling? :)

    Hi Brian and Happy New Year. I want to better understand your JV with seller example. House is free and clear and ARV is $485K. I offer to pay for $50K in repairs and want to clear $20K profit, so I secure $70K with a note and deed of trust against the property. 90 days later the property sells for asking. Seller gets proceeds minus commission/closing costs of $45K and minus my note of $70K. Seller nets $370K. If I spend the entire $50K rehab budget, I make $20K.

    Questions: where did the $50K repairs come from and how much did it cost? Do I really net $20K?

    And, is managing a $50K rehab really better than wholesaling? :)

    0Reply
  • Karen MargraveBusiness Member
    Moderator
    OP
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    12y

    @Will Barnard I was summing up what had been posted thus far, but you're right, I should have added all of those - I was asleep at the wheel! Thanks for adding those.

    0Reply
  • Russell Crooks
    Flipper · Vacaville, CA · Member since 2011 · 9 posts · 3 votes
    12y

    @Karen Margrave, I borrowed money from my 401k on my first deal, and went HML for the rest. What I did not realize is when you take a 401k loan and pay it back, you may be limited from borrowing again by your employer for a certain period. Definitely something to check on if you are going to take a 401k loan.

    0Reply
  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
    12y

    @Russell Crooks

    @Russell Crooks

    To make the @ work, do the following:

    Hold down the shift key and type @?

    Look below this Window, and you will see a list of names of people that have posted in this thread.

    Click on the name of the person that you want notified via an email, that you responded to them.

    If you are a Colleague with anyone that has not posted in the thread, and you want them to see your post, hold down the shift key and type the first 4 letters of their First or Last Name.

    Then look below this Window and click on that person's name.

    Raymond

    @Russell Crooks

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free