Hi everyone, I have a couple of questions on going about purchasing a property. I will have my own money to do these deals, but that is what I want to know. Do I use my own money or use other peoples money? Do I buy a house outright (the problem I see with that it is tying up all my money), or do I do the 20% per each house?
I want to be able to buy some houses and flip and some I want to hold for the passive income.
What are your thoughts?
Thanks
You’re wanting to do several things.
They all require money.
You would do yourself a favor by learning to leverage your money. That is, borrow as much as you can.
Of course, this assumes you’re in your wealth-building years, and not wealth preservation.
It’s always easiest and most expedient to use your own money. However, this is also the shortest way to sitting on your thumbs, because your money is now buried in an investment.
This brings me to mention that if you focus on value-added projects, you can create wealth out of thin air. That is, as you improve the project, you make it more valuable, and thus make a profit.
It’s debatable whether that is called investing, or just working for a living as a rehabber/merchandiser.
Meantime, borrowing as much money as you can is harder, requires more sophistication, and you’ll have to prove you deals are worthy, in order to borrow.
Borrowing money for a project is probably the fastest way to have a deal analyzed by someone who knows what to look for. Just saying.
I say leave as much money in the bank as you can, and borrow as much as you can. Later when your learning curve is overcome, you can risk your own cash.
BTW, the primary and best source of financing is the seller. “Always” ask the seller first.
FWIW
So to do something like that, get a list of properties together and go to the bank? Or for Apt complex?
Can you recommend any good books about leveraging money?
Thanks
OK, you’ve introduced another investing niche, apartments. This is considered multifamily residential, and is a different niche than single family residential. Financing and negotiations, etc., are unique to each. Different vocabulary.
Meantime…
Here’s a link that could be a good start for understanding leverage and using other people’s money, which is exactly what borrowing from a bank is.
While you’re investigating this concept, you can begin to determine if you’re wanting to invest for cash flow, or appreciation, or a combination of the two.
Here’s some extreme examples:
Cash flow investing: Ghetto-houses with high maintenance and heavy management and virtually no appreciation.
Appreciation investing: Newer, starter-homes with virtually no cash flow, lower maintenance, and relatively easy management.
And then there’s merchandising. For example, wholesaling, rehabbing, flipping/assigning deals of various sorts. This is not technically considered investing, per se. That’s just working in real estate.
Either way, you need to become familiar with your market. This includes knowing the values of a house and its respective rent.
Your biggest challenge will be finding deals.
As an aside, you should assume a 50% overhead on any rental house you invest in. Of course, you can donate your time and money to the maintenance and management of a given house, and lower the cash outlay, but that’s not a savings, that’s just a transfer of liability from your tenant to you.
After all, it’s the tenant’s rent that is supposed to cover all expenses, not you. And that’s why if your debt service exceeds 50% of your rental income, you can expect to donate time and money to the cause.
That said, limiting your debt service to 50% of your rental income can be HARD. Each niche will require different solutions to achieving that.
Except that, investing during certain market cycles, some speculators expect high appreciation/inflation upticks and thus absorb/ignore the negative cash flow, as part of the cost of doing business.
Sure, there was $10,000 in negative cash flow, but there was also $150,000 in appreciation during the holding period. So, what?
Of course, there’s several profit points to be considered for each investment, and you won’t necessary get all of them, but each investment can target one or more of these profit centers and be considered a “good investment.”
Inflation.
Appreciation (which can be influenced any number of things).
Loan pay-down.
Forced appreciation.
Tax treatment.
Rental demand (rent increases).
??
Recognizing a deal is the first step. Finding, negotiating, and closing on the deal is the second step. And whatever is your exit strategy, is the third step.
You’ll run out of cash at some point. Then what? That’s when you’ll learn the importance of leverage.
I’ve got a report I stole from Robert Allen that lists 50 leveraging strategies. PM me, and I’ll forward it to you.
So, go find a deal.
No. Do the stuff I mentioned in the previous post, and after you’ve chosen the niche, then you can begin looking for deals and financing.
You should talk to both a mortgage broker and a hard money lender near you, and discuss the general financing options available, based on your credit, experience, type of property you’re trying to buy, etc.
The mortgage broker will be suitable for long term, buy and hold types of investing financing.
The hard money lender will be for short-term financing on uninsurable fixers and rehab projects.
BTW, you want a couple sources of financing, not just one.
A wholesaling whale near me told us that he used private money exclusively to fund his first deals. He had filed BK and was a terrible ‘bank’ risk. So, he spent money on classified ads with headlines that read, “Licensed Appraiser Needs Money For Deals.”
Another wholesaler has his daughter call private money sources and ask if their “money is working hard enough for them?” or some variation on that theme.
Both offer various interest rates and terms, depending on what they can negotiate.
FWIW