As real estate investors, we usually tend to do things on the cheap.
I’m not sure if it was my upbringing or where I came from, but like many of us, on occasion I have to be reminded that sometimes being so cheap can also be just plain stupid. And that’s the way it was for me with hard money.
Before I even really knew what hard money was, I had pretty much been a loner, doing it my way, and somehow I still managed to build up a small portfolio of residential real estate rentals.
But looking back now, one of my biggest regrets is that I didn’t use more hard, or private, money when I was starting out in real estate.
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Are You Making Money on the Draw?
Throughout my real estate and note investing career, there’s one thing I learned: Don’t knock someone’s business model until you at least fully understand what they’re doing.
That’s the way it was for me and my buddy Russ (of “Houses R USS”). I’ll never forget having lunch one day with this super experienced real estate investor/rehabber/wholesaler/buy-and-hold guy with 100+ properties, and after I asked him how he acquired so many houses so quickly (especially since we’re about the same age), he shocked me with his answer — that he used hard money.
In fact, he bought his first 39 houses that way. At first I was taken aback, and I’m thinking to myself, this dude’s nuts. (After all, isn’t hard money super expensive with down payment requirements, points, and penalties?) So, Russ proceeded to tell me that the main reason he had done so many hard money deals was because of all the tax-free money he’d make on the draw. His strategy wowed me, as I never really thought about it like that.
When he was new to buying and rehabbing, the hard money guy he used (who also owned a huge portfolio that he had placed a massive line of credit against to do hard money deals with) was a great resource, if for nothing more than to run his deals by him, first and foremost, to be sure it truly was a good deal. Not only that, but as the hard money guy got to know him over time and understood how he actually worked, he trusted him more and more, and eventually he lowered some of his fees and rates.
But the most important value was probably in the draw schedule. Once he closed on a property, after certain stages of work were completed, the hard money guy would release the next draw, or batch of money.
So, for example, if Russ was getting $10,000 from the draw schedule for all the work that was completed by paint and carpet, and if he was able to get his crew to do it for $6,000, he would make the remaining $4,000 off the draw tax-free, because it was a loan. He said he had done this for several years starting out, and it had become like a game to him to try and come in under budget.
How Many Deals Could You Do With an Unlimited Supply of Money?
This was his next point. With almost unlimited capital behind him, the world was his oyster. He could now focus on what he did best — finding deals and running his crew.
This is a great scalability question for real estate investors (or even note buyers): “How many deals could you do if money wasn’t an issue?”
Another thing to keep in mind is that after you build a track record, it will be easier to acquire private money for your deals, which is typically still less expensive (less strict draw schedule, lower fees, fewer points, fewer inspections, etc.) than hard money.
Time to Build the Money List
As I think back to when I started out and how long things took me in my own little micromanaged world, where I’d wait until I had my own money or I’d use my own little line of credit, I realize how much time and money I wasted and how foolish I was by being so cheap. (After all, HELOC rates are lower than hard money rates, right?)
Instead, I wish I had started out more like Russ, putting true deals in my LLC, with the guidance of an experienced hard money lender, making money on the draw, with my tenants paying to build my portfolio that much faster and quicker. If anything, I could have done like Russ did over time and let my private money list eventually replace my hard money guy.
Now, my question for all of you on BiggerPockets is: What are you going to do to accelerate your real estate portfolio?
Leave me a comment below, and let’s talk!