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SHOW NOTES FOR EPISODE 522: 10 OTHER WAYS TO GET REAL ESTATE FINANCING
If you’re considering becoming a real estate investor, you may also be wondering how to finance your first purchases. Getting ideal financing is not always an option but there are other ways that can be just as effective. In today’s podcast, Bill shares 10 other ways you may not have considered to fund your property purchases.
Tip of the Week: Paying Construction Costs Before Job Completion
- Something that a lot of people have experience with is paying construction costs before job completion.
- When you make this mistake, you’ll soon wish you hadn’t
- When you pay for a construction job before its100% complete, it gives the contractor no incentive to return to finish the job.
- You’ll get frustrated and angry as you waste your time chasing a contractor who is spending this time trying to finish jobs that he hasn’t gotten paid for
- Even if he has the best intentions, in his mind, when he is paid, the job is done.
- There is no pain and not showing up again and he is not focused on his next payday.
- If you can get the contractor to accept less money down, you know like 20% down or something like that, I would do that first because the incentive will always be there until the contractor collects the last 80%.
- Or even if it’s a 50% down thing, you still have plenty of incentive to keep him or her on completing the job
- You need to make sure that you can hold back those funds as much as you can to get that job done.
- Because, If you don’t do that, You might as well assume that you will have to finish that job yourself, or pay someone else to do it.
10 Other Ways to Get Real Estate Financing
If you’re considering becoming a real estate investor, you may also be wondering how to finance it. The majority of real estate investors are either doing it as a “side hustle,” outside investment or are self-employed business persons who earn incomes by wholesaling, flipping, generating cash flow through rental income, or are passive investors in syndications and the like. But getting started in most of these types of ventures requires capital. Building up your business and income may take some time.
Now, even though most people will do their real estate investing alone, with a spouse or perhaps a partner, there are those who may even want to set-up a bit where you plan to scale-up faster so that you can oversee and delegate key responsibilities to your employees to free yourself up to enjoy other things – like your retirement!
Although start-up costs may vary by state and county, there are some key start-up costs you will have to consider. For instance, they may cover some amount of insurance, office supplies and marketing. But your upfront costs may include:
- Hiring a good real estate attorney
- Hiring a good CPA
- Setting up your entity, whether it be a C Corp or S Corp, LLC or other legal entity
- Business license
- Hiring employees or VAs (Virtual Assistants)
- Continuing education or coaching
- Computer equipment
- Accounting and real estate software
- Miscellaneous business utilities
If you don’t have ample financial runway to pay startup costs and cover your budget for at least six months, your real estate business could crash and burn quickly. As the owner of your business, you’re solely responsible for its success or failure.
Either way, whether you are a sole proprietor or launching a full-scale business, you will need capital to set-up and purchase your first properties.
Here are 10 funding options you might consider to increase your chances of success.
1. Keep Your Day Job
If you have a job, don’t be in a hurry to quit. Use your current income to help get your real estate business off the ground. Or you might start a side hustle and save the money you earn for your new venture.
Another option is to work part- or full-time in your chosen real estate field. For instance, if you might want to get a job in a real estate related business (become a Realtor, join a property management firm, work in construction or for a developer, become a mortgage loan officer or broker, etc.). That would allow you to maintain an income and learn an aspect of the business. My son Elijah is doing this…
2. Use Your Savings
Tapping your savings is the easiest way to finance your real estate career. It may take longer to save enough money to get started, but the upside is that you won’t give up any control or accumulate debt.
Also, if you can downsize or become a minimalist, where you can start saving 25-50% of your income, then you can start purchasing properties sooner than you think. Here are a few links of podcasts I’ve had that have featured people who did just that…
3. Liquidate Valuable Assets
If you’re willing to sell valuable assets, such as real estate, vehicles, a boat or RV you never use, jewelry, antiques or investments, they could be a funding source for your real estate career.
While retirement account balances might look tempting, be aware of the downsides of tapping into them. With most retirement accounts, such as a 401(k) or IRA, you’re restricted from taking early withdrawals and penalized if you’re younger than age 59.5. There was a Covid window there where you take $100K – not sure if that still exists.
For traditional accounts, withdrawals are subject to income taxes plus an additional 10% penalty. If you have a Roth account, they offer more flexibility for withdrawing contributions that were previously taxed. However, draining your retirement account is typically a bad idea because it jeopardizes your future financial security.
4. Borrow from Yourself
When you don’t have any savings or assets to fund your real estate business, another option is to borrow from yourself. For instance, you might use the equity in your home to qualify for a home equity line of credit (HELOC) or a home equity loan. They typically require at least 20% equity but come with low interest rates.
In Old Dawg’s Podcast episode #217 profiles James Kandasamy and his wife you took out a $50,000 HELOC loan and leveraged it into a personal $160 million multifamily portfolio.
Credit cards charge relatively high interest rates, but offer an easy way to finance the expenses required to launch your business. If you will carry a balance for the foreseeable future, use a personal or business card with the lowest rate possible so you can reduce interest charges. Getting a low-rate personal loan may be another option to fund your real estate career.
If your retirement plan allows for an IRA or a 401(k) loan, where you can borrow up to 50% of your balance or up to $50,000, with a five-year repayment period, including interest, that could be a source of funding. Again, tapping a retirement account should only be a financing option of last resort. But there’s something better…
5. Get a Self-Directed IRA or Solo 401K
Setting up a self-directed retirement account (if you don’t already have one) is one of the best ways to invest tax-free (or really tax-deferred) until you are in your 70s, if you wanted.
I’m going to put in some links that talk about this in detail but that can be a great way to access your retirement funds WITHOUT having to pay interest on a loan or be penalized for early withdrawl.
Here are the links…
6. Borrow from Friends or Family
Many small business owners get started by taking funding from friends or family who can give you a loan. While they may offer flexible repayment terms or a low-interest rate, this option comes with high risks if it jeopardizes your relationship.
Carefully consider what would happen if your real estate venture fails or if it takes you much longer than expected to repay the loan. It’s essential to well-document the terms of a loan from family or friends, so there aren’t any misunderstandings later on.
7. Get a Business Loan
Many banks and credit unions offer business loans to start or expand your venture. With Covid, a whole bunch of credit is being extended via PPP Loans and other forgiveable loans currently available.
Getting a business loan may require you to have good credit, collateral and a business plan with income and expense projections. Or you may need a co-signer with good credit who agrees to be fully responsible for the debt.
If you need a loan with fewer financial requirements, consider applying for a Small Business Administration (SBA) loan. They guarantee repayment to institutions that underwrite loans for entrepreneurs, making you a less risky borrower. SBA.gov has a list of lenders that offer SBA-guaranteed loans.
8. Develop a Business Line of Credit
A business line of credit from a bank or credit union allows you to tap into funds up to a limit when you need them for your business. As you repay amounts withdrawn plus interest, your credit line increases to the original amount, which you can continue to use.
A credit line is one of the most flexible ways to fund your startup real estate business but qualifying may require good credit or collateral.
Credit Suite is a company that can teach you how to build business credit faster than you could normally do by yourself.
9. Use 0% Credit Cards
Zero percent credit cards can be a cheaper way to finance just as long as you make it a priority to pay off the cards right after your transaction. For one thing, you don’t have to start paying interest until the bill is due, giving you a few weeks to float purchases interest-free. Amber also likes the option of using a balance transfer credit card if they need to carry the debt a little longer than expected.
Companies like Fund & Grow will help you set up a separate business for your real estate investing financing with its own tax ID and will get the 0% interest business credit cards under that company. They can secure $50-250K in credit card business credit.
19. Find a Partner
Suppose you’re interested in finding a partner. You may be able to find someone who loves investing in real estate for the great returns but doesn’t have the time to do the leg work. You could offer to put in the “sweat equity” if they can put in the cold cash. That way, you can do the research, find the markets, find the properties, do the underwriting and manage the properties. In that case, they make the investment and enjoy the benefits of your hard work.
Here are some links…
In Conclusion
So there are 10 ways you can get your business going.
Yes, I didn’t mention things like:
- Wholesaling or flipping to raise money because you still have to invest in something (pay for a direct mail campaign, buy a house to fix-up, etc.) to be successful
Check out some of my popular podcasts on getting started with little or no money down…
- 500: 16 No Money Down Strategies You Might Not Know
- 430: 7 Ways to Buy Rental Properties with Little or No Money Down
- Can People Really Buy Properties for No Money Down?
- 084: 10 Best Ways to Buy a Property with Little or No Money Down
- 021: Buying Properties with Little or No Money Down with Brandon Turner
- 334: How to Acquire Investment Properties With No or Little Money Down
Once you know what you want to do as a real estate investor, start calculating your startup expenses and saving money. Then, do your homework to figure out which funding sources you can rely on to launch your new business successfully.
Well, that’s it for today!
Resources:
https://www.entrepreneur.com/article/365387
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