Just trying to get started...

Financing, Hard Money Lenders, Private Money
1

Hello all,

I’ve been reading these forums for a few months now, and everyone seems very knowledgeable, friendly, and helpful. This is the first time I’ve posted here, and I was hoping to get a little direction from “professionals of the industry”.

Four months ago, my business partner and I decided to start our real estate development and construction business. Our business model is to purchase dilapidated homes in Sacramento, CA and rent them out as long term investments. As we progress, we will expand into other sectors of real estate investing. We have been in the pre-launch stage (creating business plans, cash-flow analyses, researching, etc.) until now…

Since neither of us have disposable income, our most prominent obstacle to overcome is to get financing. We have analyzed traditional lending situations, hard money, and private investors. We have found that soliciting a group of private investors with negotiable terms is the best solution to getting our business off the ground.

My partner and I are recent (within the last 3 years) Construction Management graduates in California and have been in the construction industry for about the past 10 years. We are a licensed builder, have a LEED AP, and are very eager to start our projects. We have a mentor, who had a very successful and similar business for 38 years. Our mentor is a strong believer in “advising and directing” us, and not “giving” us the answers. I respect this philosophy tremendously.

Now that you know a little about us, this finally leads me to my questions…

-Has anyone had experience in finding private investors? If so, where do I look and how solicit people as investors? We have searched via internet, but find it difficult to weed out the scams, junk, and get-rich-quick programs.

-Does anyone have examples of hard money loans actually working? I have done countless financial analyses, and the lending terms are far too expensive to work effectively.

-We are also working closely with an SBA expert, and might qualify for a loan…

We are interested in hearing about any success stories, failures, etc. that could help us further our knowledge or spark ideas to launch our business. Thanks for any help, direction, or advice!

-James

2

HML lenders are expensive, but they absolutely can and do work when the purchase/rehab costs of the property make sense. One, HMLs are short term solutions, and can usually only make fiscal sense when used as such. You need capital to get into props, and yes, you’re probably going to take a hit in the 10-15% interest range (plus points) to do so. These types of interests rates are generally only sustainable for period of 1-6 months, after that, they completely eat into your profit and can even push you into the negative, which is why exit strategies are so important. Whether it’s having a buyer lined up in place or a bank lined up to refi, an exit strategy is paramount to making HM work. HML know this, which is why they want to see a plan A, plan B, and plan C in place before lending to you.
The second part of making HM work for you is buying your properties at enough of a discount. I generally like to buy my rehab properties at 50-65% LTV, which leaves me a cushion of 5-20% for rehab and other carrying costs. If I bought my properties at 70%LTV before rehabs, then yes, HML would NEVER work, which is why most HML won’t lend higher than 70% ARV, because they understand that the prices they charge aren’t sustainable if properties are purchased and held at these equity levels.

3

Great info and thank you for sharing it! That is one situation that we were analyzing; unfortunately, I think we will have problems getting a refi lined up. Everyone we have talked to tells us that our credit isn’t established (we don’t have bad credit, but we are young and don’t have a track record), we need proof of income (we’re self employed now, so no cash until we start making it), or they tell us that due to the current market it will be next to impossible. Selling the property is a good idea, but how realistic is it right now? I know here in Cali the market is still pretty saturated with foreclosures and homes for sale. We’re definitely open to all ideas, we just like asking questions to further our knowledge. :biggrin I’m going to re-evaluate this situation, again.

Another situation we are considering is partnering with someone (or a couple people) for one or two homes. Hopefully, this situation would provide us with some equity to back our process and advance our credit during the process.

Please keep sharing ideas and different situations you guys have encountered, we’re learning!

-James

4

James,

Congratulations on starting your new business. Getting a foothold now in the tough times will definitely give you a leg up once we get through this. There are a couple of things you mentioned that I wanted to comment on. First, SBA loans are not for real estate development and sale. The only time an SBA loan can be used for this purpose is if you will be using the real estate for your business. For example if you wanted to open a dry cleaner and you needed the SBA loan to buy the building where you would be housing your cleaning service. You can visit the SBA website for more details. You will also find it very difficult to find long term lending with no income. Starting out as a self-employed borrower is very difficult. It is definitely a catch-22 situation. You can’t make money without a loan, but you can’t get a loan without money. I would suggest that you and your partner either both get full time jobs for awhile (at least until you can live off your rental income which can take years) or start out bird-dogging for other investors until you can build up enough money to get your business off the ground.

Another suggestion would be to make your first purchase a duplex. This way you can utilize FHA financing with a low downpayment, take advantage of the $8000 tax credit, and start learning the ropes of being a landlord all at the same time. If you and your partner each did this you would have 4 units under your belt immediately. Plus next year you would have $16k (the $8K tax credit X 2) to use for more property acquisition. Good luck and stick with it. Hope this helps.

5

Thanks for the encouragement and information. We are researching all options, and weeding out what works and what doesn’t. The FHA information is great. We’ve actually attended an FHA Expo, but were not able to gather the information that you’ve presented. Everyone we talked to told us that the FHA program wasn’t for investors. It was our mistake for introducing ourselves as investors… However, I’ve heard that there is an FHA program that allows investors to finance up to 4 properties? Sifting through the information to find the truth has become one of our great tasks. FHA is definitely a interesting option that I’m going to continue researching.

We have discussed the options available through the Streamline 203k program with a 203k agent who guaranteed us that it would work for what we are trying to accomplish. However, the “guarantee” made us feel a little uneasy, and we decided to trust our gut feelings and not pursue the option any further without consulting other professionals first. (Anyone experienced or have opinions on the 203k program as well?) The 203k program would be used just to get us some equity, it is our understanding that you have to live in the home you purchase using this program. Are we allowed to rent out 2 of the rooms in a 3bed-2bath?

We have decided to bird-dog investors, instead of getting another job. This decision is based on a myriad of factors that I won’t bore you guys with. Any suggestions on bird-dogging private investors?

Great info and thank you for entertaining our inquiries!

-James

6

Very ambitious goals. Start a real estate endeavor with no capital? In California no less. You’re kidding right? UCLA grads? LoL, just kidding. If you were here, I’d consider partnering. With your background and education, I’d angle for a GC or property management position. Great way to learn the ropes with little cap outlay. What about creating a not for profit to tap the soon to be enormous outflow of grant money for new biz as it relates to home retro-fit and renovation to energy efficiency. I’m considering it myself. Even if cap and tax doesn’t pass, gov. funds could still be available and with so many libs, biz would surely boom.

Right now, my best resources for investors are CPA’s and Financial Planners. In my state, Indiana, I can show an annual after tax ROI of 6%-10%. So many people have lost money in the market, my alternative has become appealling to cash flow investors. If you approached a Financial Planner with the whole process of identifying a property to renovation to management you could be rockin and rollin. Investors are looking for that level of service.

Oh by the way, I think if you buy a duplex, you must live on one side to utilize FHA financing.

Knock em dead!!!

-H

7

Obviously, you are learning how important it is to build good credit.

Make sure you work on that every day!

By taking out credit cards, pay half one month, pay it all off the next… rinse… repeat, you will quickly develop a good credit rating. It will make it much easier down the road.

Good luck!

8

I think you are very ambitious and and also wish you good luck.

9

Thanks for all of the support! We are very ambitious. Times are difficult, but not impossible. We are moving forward with some very promising leads and hope to be off the ground in the next month or two.

Credit is key. We have been working on it, but it’s a slow process. :banghead

Please keep adding information, thoughts, etc. You guys have been great!

10

I completely feel the struggle that you’re going through to get your biz started, as I went through it myself. Keep pushing forward, don’t give up when things get tough, and always remember to work smarter, not harder. Trust me, itll feel like an insurmountable mountain to climb, but once you get the first couple deals under your belt, you’ll realize that all the hard work was totally worth it!

Also, you’re very much on track with understanding the importance of personal/biz credit management/manipulation being important to ur growth. Keep going!