Contractor's Wife Dying to Get Into Real Estate
Hi, I am married to a general contractor who does kitchen/bathroom remodeling, decks, drywall....yada, yada, yada and we would love to get into real estate. I feel I am more motivated than him and that is probably because he is more of a cynic than I. Ever since I was little and my mom would take me to open houses in these huge Victorians, I have wanted to get into real estate. We don't want to part without savings for a down payment and are free and clear of the mortgage in the home we live in now. What is the best option as far as getting money lent from a business like a bank or hard money lender? I have heard about hard money loans but it seems like that is scary, but maybe our only option. We have great credit and can do the work! Unfortunately, we have poor friends and family so the option to use them as lenders is out of the question.
Hard Money Loans are short term loans. You want to be in one for as few weeks as possible. Unless you find a killer deal you are still going to have to come out of pocket for some sort of downpayment. Zero down deals are like finding a diamond in your back yard. You may be able to find one, but you probably won't.
Mindset change is the hardest part about becoming a real estate investor. It is very hard to get out of the Dave Ramsey pay-down-every-debt way of thinking. Instead of telling you what to do, I'll just ask you a few questions.
- How much is the equity sitting in your house earning you? I'm not talking about the appreciation on your house. You get that through ownership, whether or not you have a mortgage.
- Put another way, how much money are you saving by having your house paid off?
- Let's say you find a single family deal that makes you a 10% annualized return (which would be on the very low end of what I have seen) and to buy it you took out a mortgage out on your house at 6%, would you be better off or worse off?
Exciting times. For your situation I suggest try and find a seller finance deal. Get on the phones and put in the work. It's a practice. There are many cold calling methods out there to be searched. Text campaigns also can work. If you DM me I can advise on using a data company to save you time. You are smart to sharpen your knives now. I'm planning for both scenarios: market really dropping, and market continually leveled off by late 22' early 23'. You may consider a heloc on your existing prop for repairs and will likely find it more favourable than a hard money loan. Heloc you only take what you need it's basically a credit line so your husband may warm to this graduated approach over a cash out refi, or hard money loan. Good luck!
@Jillian Conklin I think it's great you guys are wanting to get involved more on the investment side than the contract side, even if it is being pushed by you. There are a few things you should be aware of, and @Greg Scott honed in on one of them.
#1: Whether you go through a bank, Hard Money or even private money (assuming they are actually in the business of lending) you will need to put money down. ANy lender that will loan to you requires "skin-in-the-game". The primary ways around this are you find private money (different than private lenders) or you build a long-term relationship with a private lender (ie; completing a LOT of deals) and the PL allows you to do a 100% funded project. Either way, you will need to have a downpayment.
#2: You will also need to have additional capital for closing costs, and holding costs of carrying the loan and paying for utilities throughout the project. As well you will want a contingency reserve for "whoops" factors on your project. Historically its been around 10% of the project costs, however in today's rapidly adjusting materials costs world, it may be wise to set aside 15% as a contingency reserve
#3: There are THREE primary sources of capital in RE Investing - A) Hard Money Lenders "HML" | B) Private Lenders "PL" | C) Private Money "OPM". Each one is unique and different, however, the terms are often skewed, and this is intentionally done. Let's start off with HML.
- Hard Money Lender "HML": Historically HML charged A LOT of points upfront and maxed out the annual rate. HML over the past few decades have become synonymous with "Loan Sharks". This of course does not benefit an HML as far as public perception. After the 08" financial crisis you started to see HML "rebrand themselves as PL. Why? Private lenders historically were an individual who had a boat loan of money and did not know what to do with it. They were your "family" and "friends" as you even mentioned above. So HML realized that by simply shifting the terminology of what they called themselves from one that causes a visceral reaction, to one that makes you think of your rich uncle smoking a pipe on the front porch and handing out all the cheap, abundant cash he has... well they could change the way the public perceives them.
- Private Lender "PL": Historically speaking PL was actually today's definition of private money, I'll cover that in a minute. Now as the HML has begun absorbing this term, it's even more important to discover the difference between a PL and an HML who calls themself a PL. A TRUE PL is someone who lends out their own capital, also called portfolio lending, because they, the PL, keep the Mortgage and Note as part of their personal portfolio. A TRUE PL NORMALLY will not pull credit, or check your tax returns or verify your income. Now with the advent of many vendors in the lending space realizing that there are PL who have a business and need business functionality, you may see a PL actually pull credit and do some of these other checks that historically speaking have only been required by HML. I won't go into why a credit check is so important to investors so that they know what type of lender they are dealing with but it speaks volumes when an investor requests a loan and the "Private Lender" requests a credit score check.
- Private Money (Other Peoples Money) "OPM": You hear this type of capital investor preached from the stage at every REI seminar and event. This is the "Goose that laid the golden egg". These are "Family" and "Friends". Most likely they are not sophisticated in the REI space and they have no idea what questions to ask you to vet the validity of the deal. They truly ar lending NOT based on asset (because they don't even know how to "vet" the asset) they are "lending" based solely on the relationship between them and you. This type of investor is almost always happy to simply beat the market/ ie saving account. And the fact they know you, the better they feel. The problem is that the Gurus have not kept up with the "hostile takeover" of the term PL being acted out by the HML. Therefore these Gurus are teaching their student to go find "Private Lenders". But in reality, a PL is NOT the OPM, instead, the PL is someone running a business, they are sophisticated and they know how to mitigate risks and cover their downside. So many REI students get frustrated when they try reaching out to PL (because that's what their trainer/ teacher taught them to do) thinking that the PL is actually OPM.
Now, why did I go over all of this? Well twofold, to give you insight for when you are searching for a lender, ensure you know who you're speaking with. Two borrowing money is not the scary thing that many people think it is. By, finding the right lender, and having them in your court, it can make getting your first of many projects under contract and closed, easy, smooth, and refreshing. My suggestion is to find a local PL that is in the business of lending. Typically a small shop and not a company that has a large national presence. Then do your research on the PL. Depending on the state they may or may not need a lic. Most PLs do not need a license to lend to an entity buying property for investment (business) purposes. If I can be of any assistance please reach out. Best wishes and much success!
You're looking at floating 30k - 35k per every hundred thousand of value, but that includes everything: down payment, points/fees, closing costs, and debt reserve. That number used to be 25k. You could get a deal done for 25k as a rookie. Now it's 35k per 100k of value. Now if you are a flipper, then when you sell you get all your float back and what's left is the net profit. I have a few suggestions for you as new investors;
1) You and your husband should open an LLC. The one with better credit should be 81% owner and the other 19%, if similar credit than can be 50/50 but if anyone has an arrest of any kind on record I'd go with the 81/19 split. When a company member is under 20% banks tend to not run credit and b.g. on them.
2) Start small. Stay in that 150k or less as-is value with no more than 40k rehab. Your loan amount would be about 160k. Build small and creep up in as-is values, especially to start. Small loan amount means points are smaller and debt payments are smaller. Get your feet wet.
3) Check the avg. days on market for the zip codes of potential assets. Get a sense for how long things are sitting, and how long comp houses have been on the market if not sold. In the appraisal report, you'll get a side by side comparison of your property after repairs compared to three comp houses selected by the appraiser. You are at a huge, huge advantage that it sounds like your husband can do a lot of the interior work. Most new investors do not have this asset.
4) Remember, if you flip then you get all that float back plus profit, if you hold then you get just a portion of your float back in a refi - not the whole thing usually and not any profit - unless you have just a fabulous deal where the ARV is like double purchase price + rehab. The contractor relationship is probably the most important one for investors and sound like you guys have it. You're smart to use that, I wonder why your husband is sour on real estate...
5) Be prepared to lay out that 30k - 35k for a deal. Just noway around it. Bank's do not want to lend to scared or money strapped investors right now. Rates are going to be raised again by the FED and that will trickle down to nearly every lending industry. And the bridge loan w/ rehab funds programs have taken on huge adjustments in the last two months. Rates have gone up, leverage has gone down. They are pricing out investors who are scrounging and scraping together to do a deal.
6) I have aspirations as well to invest in real estate. I see these deals everyday that people make. It's crazy. 50k - 60k spread on purchase +rehab and ARV. I intend to flip out of the gate. Work in three markets, get good connections for contractors and real estate agents in those markets and have them keep an eye out for me for anything good. If you own your home, can you set up a HELOC? I know it is scary to enter that first deal because you immediately go to the nightmare scenario - You can't sell and you're paying 7, 8, 9 debt payments and you're running out of time. The balloon payment looms. You either have to get a tenant and refi or lower your asking price until you get a bite. That's a nightmare situation for your first venture but I'm sure it happens. My wife is worried about it too. That's the risk though.
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Hey @Jillian Conklin it sounds like you need to start hanging out with richer friends!! Seriously.
Start going to real estate groups or meetups in your area. Get to be friends with other investors. You really have to change your whole mindset. Investor is way different from being an employee. Business owner is way different from being an employee and so is business owner from being an investor.
You need to see life through the mind of an investor. Networking is a major part of being an investor. Your business will grow as a contractor AND you will start to invest in properties.
Network and meet other people to see how they do it. Give back information as a contractor.
Quote from @Greg Scott:
Hard Money Loans are short term loans. You want to be in one for as few weeks as possible. Unless you find a killer deal you are still going to have to come out of pocket for some sort of downpayment. Zero down deals are like finding a diamond in your back yard. You may be able to find one, but you probably won't.
Mindset change is the hardest part about becoming a real estate investor. It is very hard to get out of the Dave Ramsey pay-down-every-debt way of thinking. Instead of telling you what to do, I'll just ask you a few questions.
- How much is the equity sitting in your house earning you? I'm not talking about the appreciation on your house. You get that through ownership, whether or not you have a mortgage.
- Put another way, how much money are you saving by having your house paid off?
- Let's say you find a single family deal that makes you a 10% annualized return (which would be on the very low end of what I have seen) and to buy it you took out a mortgage out on your house at 6%, would you be better off or worse off?
Wow, I never looked at it like that. I just always assumed a paid off home is a blessing and to keep it that way, but what you said makes sense. My home is not making me any money right now, it's time I make a change. Thanks!
Quote from @Mike Klarman:
You're looking at floating 30k - 35k per every hundred thousand of value, but that includes everything: down payment, points/fees, closing costs, and debt reserve. That number used to be 25k. You could get a deal done for 25k as a rookie. Now it's 35k per 100k of value. Now if you are a flipper, then when you sell you get all your float back and what's left is the net profit. I have a few suggestions for you as new investors;
1) You and your husband should open an LLC. The one with better credit should be 81% owner and the other 19%, if similar credit than can be 50/50 but if anyone has an arrest of any kind on record I'd go with the 81/19 split. When a company member is under 20% banks tend to not run credit and b.g. on them.
2) Start small. Stay in that 150k or less as-is value with no more than 40k rehab. Your loan amount would be about 160k. Build small and creep up in as-is values, especially to start. Small loan amount means points are smaller and debt payments are smaller. Get your feet wet.
3) Check the avg. days on market for the zip codes of potential assets. Get a sense for how long things are sitting, and how long comp houses have been on the market if not sold. In the appraisal report, you'll get a side by side comparison of your property after repairs compared to three comp houses selected by the appraiser. You are at a huge, huge advantage that it sounds like your husband can do a lot of the interior work. Most new investors do not have this asset.
4) Remember, if you flip then you get all that float back plus profit, if you hold then you get just a portion of your float back in a refi - not the whole thing usually and not any profit - unless you have just a fabulous deal where the ARV is like double purchase price + rehab. The contractor relationship is probably the most important one for investors and sound like you guys have it. You're smart to use that, I wonder why your husband is sour on real estate...
5) Be prepared to lay out that 30k - 35k for a deal. Just noway around it. Bank's do not want to lend to scared or money strapped investors right now. Rates are going to be raised again by the FED and that will trickle down to nearly every lending industry. And the bridge loan w/ rehab funds programs have taken on huge adjustments in the last two months. Rates have gone up, leverage has gone down. They are pricing out investors who are scrounging and scraping together to do a deal.
6) I have aspirations as well to invest in real estate. I see these deals everyday that people make. It's crazy. 50k - 60k spread on purchase +rehab and ARV. I intend to flip out of the gate. Work in three markets, get good connections for contractors and real estate agents in those markets and have them keep an eye out for me for anything good. If you own your home, can you set up a HELOC? I know it is scary to enter that first deal because you immediately go to the nightmare scenario - You can't sell and you're paying 7, 8, 9 debt payments and you're running out of time. The balloon payment looms. You either have to get a tenant and refi or lower your asking price until you get a bite. That's a nightmare situation for your first venture but I'm sure it happens. My wife is worried about it too. That's the risk though.
Great advice! I am sure we can get a HELOC, but I can't do that until my husband is 100% on board. We have an LLC I have 20% he has 80% since he runs his own home improvement business. We just gotta weigh our options. Thanks for the info!
Id personally learn as much as you can in the next several months and watch what the market is doing. Really understand what very specific area you are looking for and what your goals are in that market so when you see that deal, you know to go after it.
During that time save as much as possible. I wouldn't personally suggest someone taking on a hard money loan unless the deal was amazing and had someone on their team that had gone through the process before. You may be in hood hands with your husband but Philadelphia properties can always throw a monkey wrench at you 😊
Hey Jillian!
Don't be afraid of hard money loans, really the only difference with them is that you are typically paying a MUCH higher interest rate than you would with a conventional loan.
Another way you guys might be able to get into real estate without a lot of money down is by learning more about creative finance.
We learned almost all that we know about it through Pace Morby on YouTube. Look him up! You guys see that there are many other ways to obtain real estate than with a traditional lender.
Good Luck!
-Lexey