Not very many people take the time to think about the positives and negatives about financing. The generation that grew up in the shadow of the depression learned that living on credit can have terrible consequences, but people today are more in debt than ever. Which one is right?
The answer is somewhere in the middle. Using credit can be a good thing, but it can also be a bad thing if it’s used improperly.
When I first heard of hard money loans, I thought they were highway robbery but after speaking to another investor I realized that hard money loans have their place, you just have to know where and when they make sense. Hard money loans are meant for the short term and when used right, can generate more profit than the cost of the loan. When used right they can be a wonderful tool, but only if they are applied properly.
Lots of very successful entrepreneurs have built their empires on credit, that is to say debt. Debt allows them to buy skyscrapers and factories, things that they never would have been able to buy if they were just saving up their money. Robert Kiyosaki, the author of Rich Dad, Poor Dad, said that wealth is built on good debt and I have to agree. But you have to be careful when it comes to debt, bad decisions in businesses that are leveraged with debt can lead to losing everything that you worked to build.
There are a lot of different options for financing, but understanding the pros and cons of each is critical. Traditional financing has its place, but come with a lot of conditions. Hard money loans and private money are good in certain situations but not in others. One of the most important types of financing you can understand is owner financing. The best piece of real estate in the world can become the worst piece of real estate in the world if you have bad financing.
Understanding the financing you can use makes a massive difference in the profit you can make in your business. If you don’t have to use credit cards for lifestyle money, don’t. Wait until you have the cash flowing properties to pay for the lifestyle you want. If you can master owner financing, you’ll find that the profit margins are so much greater because you can come up with a deal where both parties get what they want.
The biggest take away is you have to know what you’re doing with financing if you want to get the best deals and create the lifestyle you want for yourself and your family. So master seller financing and start building a business that does just that.
One thing will always improve your success rate when buying real estate. Every time you sit down to have a face to face conversation with a seller, you must ask yourself the following questions:
“Did I take adequate time to build an adequate rapport with the seller?” You’re not going to have a very successful negotiation if the person on the other side of the table doesn’t believe in you.
“Did I find out why they are selling?” Without that reason, you’re going to have a difficult time negotiating. How can you know what to provide if you don’t know what they need?
“Did I determine what the highest and best use of the property really is?” Are you going to flip the property wholesale or retail, or alternatively, are you going to rent it out long term? It’s going to be one of those three and you must figure out what the best option is.
“Did you find out what the sellers really want?” Maybe you can give them what they want, but you will never know if you don’t ask.
“Did I find out what they need the money they are asking for?” If you find that out, maybe you can solve their problem a lot easier.
“Did you find out where they want to go?” If you know that, maybe you can help them buy a property or move into the area they are looking at.
“Did I do a thorough inspection of the property for repairs?” If you don’t do that, you are going to be sorry later if you end up buying that property. Even if you have to bring in a contractor to give you that quote, you need that info in order to make a good buying decision.
“Did I thoroughly explain why I need terms that will allow that property to work for me?” If you’re going to rent out the property, it has to pay for itself from the rent it brings in after expenses. To get that you have to get a payment that will cover you costs and allow for cash flow.
“Did I give the seller several options to buy their property?” Cash is not the only thing that people want. Once you know what they want, you can present several options that will help the seller get exactly that.
“Did I thoroughly explain each of your offers and how it will be good for them?” There are a lot of advantages that seller financing comes with but you may have to lay them out for people to see them.
“What offers did I make?” If you have access to funding, did you offer all cash? Are there other things other than cash that you can also come up with? There are hundreds of ways to structure an offer that can make it better for you and the seller, but you have to know what they want.
Never leave until you’ve exhausted all your options and you will have considerably more success in your real estate investing career.
A lot people say they need to have a partner in order to run their business. While there are people out there that can make a good partner, you have to be very careful about who you trust with your business. There are a lot things that can make a partnership go south and when that happens, that usually means big trouble.
I’ve had three partners over the course of my 40 year career in real estate investing and in all three, the partnerships eventually went bad. So bad in fact, that with my first partnership I basically lost everything I had worked for and built. The biggest lesson I learned was that you have to get back in the game, even after a major failure. You’ve only truly failed when you give up.
And a partnership failure can happen to anyone, even the experts. You can structure great deals and build a great business, and all of that can still fall apart if the partnership doesn’t work out.
It’s important to remember that just because you don’t know what you’re doing, that doesn’t mean you need to take on a partner. If you start with smaller deals and gain the experience you need one property at a time, you become more resilient. You will build a business slowly that’s more robust and less likely to fall to pieces just because one of your partners back out.
If you are going into a partnership, there are a few things you need make sure are in place. The first thing is a written contract, you must have everything in writing. It protects you as well as your partner and lays out what everyone involved is responsible for. Make sure everyone is compensated for what they bring to the table and keep the conversation going. Don’t hide if something goes wrong and stay in contact.
The bottom line is if you say you are going to do something, then do it. The same goes for any partners you work with too.
There are a lot of things you need to know about before you can do a subject to deal. The first of which is you have to know what the term actually means. Subject to is by definition simply a disclosure to any exceptions to a free and clear title. You also have to understand that the terms that you create with the seller in your deal, has nothing to do with the lender.
There are a number of court cases that have established that subject to deals can’t be considered fraud. Another important aspect of subject to deals is that many investors use a unique structure called a Land Trust to get them done. A Land Trust is a special version of the trust that only holds the title of a property and is a simple way to keep the title out of view of the public.
The biggest risk of a subject to deal is for the lender to call the loan on the property, but in all the years that I’ve known of investors doing these kinds of deals I’ve only seen a couple get called. It’s rare but it is a risk that you have to be ready for. Keeping that in mind, one of the most difficult parts of your subject to deal may be just finding an attorney that understands the Land Trust and will help you close the deal correctly.
For most subject to deals there is a loan balance on the property and attorneys will usually tell you that you need to pay off the loan first, but that’s just not true. There are ways to structure the deal without paying off the existing mortgage, which is the main focus of the Land Trust class, an event I hold a few times each year.
If you’re going to be a good investor, why would you want to come up with the money to pay off the first mortgage if you don’t have to? As long as you understand the risks, doing a subject to deal is an established way of getting a deal closed. So find an attorney that understands a Land Trust and what you’re trying to do if you’re going to do subject to deals.
Too many people skip doing the math before they jump on the short term AirBNB rental properties and the numbers are critical. If you don’t do the math before you buy you could end up with a property that only costs you money. Do not base your buying decision on what you can supposedly rent it out at with AirBNB.
If you’re going to buy an AirBNB property, don’t use the AirBNB rent to make your calculations. Instead, think of it as a regular rental property, because there are a lot of factors that could cause you problems if you rely on AirBNB to make that property profitable. You especially have to know the area, not all cities make sense for the short term rental market.
The trouble is AirBNB’s are hot right now and people have stars in their eyes about how much money they are going to make. Never listen to the dreams, do the math and find out for yourself what the realistic numbers are going to be. Each rental property is a business unto itself, so make sure you run it like a business. If it can’t pay for itself, don’t buy it.
You also have to consider that no property is rented 100% of the time. The tenant will always move on eventually, and with short term rentals you have even more turnover and less guarantee that it will be rented at any given time. Combined with possible noise complaints, property damage, and cleanup issues, short term rentals are more involved than most people think. Just like a regular rental property, you should screen your tenants and make sure that you always follow the laws in your area.
Sometimes you also have to manage your property manager. Just like your tenants, you have to do your homework on potential managers to make sure that you find someone that will take care of your property right and not take advantage of you.