Last week I wrote about my discussions with a local loan officer for a small bank in my area. This article really touched a nerve not only with the number of comments but also with at least one of my clients.
I sent a link to the article out to my clients to ensure they were up-to-date with what was happening in their primary market, and the response I got from one of them was, “Pete – I read that article and had to take two tranquilizers to sleep that night!”
I hope for your sake you did not have a similar response?
So, after much thought regarding this clients’ comments I got to thinking: now that we agree that our world is topsy-turvy, what options are still available to each of us to fund our deals! And that is what I will devote the rest of this commentary to.
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Contrary to the doom and gloom that one could easily deduce from my above mentioned article, not every bank is out of the real estate lending business. In fact, as I have said many times before, small local banks need us as much as we need them. And, there are banks, even in your market, who are lending. Your challenge is to find and convince them that you are a good risk; and as with any relationship in life, these banks are not going to open up the vault until they are comfortable with you and your business. Here’s a perfect example of this . . . one of my clients could not get normal bank financing because the deal she was financing was her first, and she did not live in the immediate market where the deal was. So, she had to move to option “B” — Hard Money Lenders .
Hard Money Lenders…
One of the comments to the referenced article was from a hard money lender who is thriving in this market. Why wouldn’t he be? For many investors, hard money is the only money available to them for a variety of reasons, including unwilling lenders, just as discussed regarding my client above. Hard money lenders offer a great service allowing investors to get deals closed quickly with relatively fewer challenges as opposed to when underwritten by a bank. The drawbacks are a hard money lenders’ conservative view of the world, resulting in smaller loan amounts and the most obvious, the higher cost of the borrowed funds.
Private lenders are starting to come into the real estate market in great numbers. For many real estate investors, creating relationships (there’s that word again) means the difference between doing a deal or not doing a deal. The most common question I am asked is, “where do you find private investors, and once I have found one, what do I say?” My response to that question within the context of this article is simple. You better learn the what and how quickly, as private lenders are becoming a mainstay within our communities. Here’s a hint: Adam Davis is an active blogger here on BiggerPockets and appears to be somewhat of an expert in dealing with private lenders. You might want to get in touch . . .
Good Old Creative Real Estate
This is just like Deja-Vu all over again. Many of you are too young to remember the challenges of the late 70’s and early 80’s. Yes, I know I am dating myself. You know, that time when inflation was running around 12% and mortgage interest rates were comfortably at 18%. In spite of those tremendous dual challenges investors were thriving. Why? Because when all of the capital either dried up or became too expensive; becoming creative was the only way to get deals done, and they did get done. What strategies were used were loan assumptions (I think we call them Subject 2’s today), seller financing, wrap-around mortgages, sandwich lease options, and I am sure many more. While these techniques have been around for ever, many of them are not always widely promoted because when money is cheap and easy, why get creative?
Getting Really, Really Creative
For many real estate investors, finding and creating a relationship with one or two private lenders is all that is needed to secure sufficient funds for their business. For many others, one or two private lenders just won’t cut it. What to do? Simple, why not create your own real estate investment trust? While this is not for the faint of heart, I can tell you from personal experience that when you step into this world, it is not hard to envision as a war chest that allows you to buy with impunity. As I mentioned, this is not for the faint of heart as the rules are exacting and must be followed closely. This is one of those concepts where you CANNOT go it alone, and will need a competent securities attorney to guide you through the process.
Let’s be brutally honest here. Our world, especially the financial world, is a quagmire with shifts and undulations occurring at such a rapid pace and it is hard to keep up. Yet, unless you want to go the way of the dinosaur, you better start adapting, because without capital or other creative methods to acquire and improve real estate you will be dead!
My recommendation in closing out this topic is this…
Just as two tranquilizers were required by my client for a restful sleep, mastering two or more of the above suggestions will be critical to your success as a real estate investor.
As always, I look forward to a healthy discussion on this topic.