As a real estate investor, one of your concerns is always where financing for your next deal will come from. In spite of all the creative techniques out there, there are times when you just have to bite the bullet and actually borrow money to make a purchase.
While the ideal scenario is borrowing money from a bank or mortgage company at the best rate possible, that isn’t always an option. For instance, if you are doing a rehab project, a traditional lender may not be willing to lend money on the project. The willingness of a traditional lender will depend on how much rehab is needed and how flexible they are in their lending guidelines. Generally anything more than light cosmetic rehab could have you scrambling for funds to close on a super deal.
So how do you come up with the cash to close on this super deal the traditional lender won’t touch and that the seller won’t do any take back financing.
1) Borrow money from a trusted source - a friend/family member or private money lender you have a relationship with. This is probably the most cost effective way to make the purchase. A family member won’t charge points or outrageous interest rates and if a deal is good enough, you can usually negotiate a reasonably sweet lending deal through a private lender.
2) Hard money lender - These folks are EXPENSIVE but are sometimes the only option to make a deal work. Expect to pay 3-6 points for every 3-6 months that you have the loan out. And expect to pay 15-18% interest or more on your money. Also expect to pay periodic inspection fees to get them to release funds periodically to cover your fixup costs. These fix up funds stay with the lender till the work is signed off on so you pay interest on funds not in your hand plus you have to come up with the cash up front for each stage of fixup - or negotiate with the work crews to not get paid till the funds are released.
All in all, hard money is a good solution for the right deal but it has many drawbacks that can make it a risky financing option - especially for a novice investor.
If you decide a deal needs a hard money lender, do some shopping around. Ask other members of your local real estate club for recommendations. Terms and points can vary dramatically from lender to lender and from deal to deal.
3) Credit card financing. This can only work if you have a large credit line that you can access on one or more credit cards to do a deal. For the sake of this article, lets assume that you do have enough available credit.
Depending on the specials happening with your credit card companies, this can be an effective way to scrape up funds to close and/or pay for rehab of a property.
There are two aspects of credit card interest - a purchase interest rate and a cash advance interest rate. If your credit is good, the purchase rate is almost always better than the cash advance rate.
The options in credit card financing depend dramatically on the offers the credit card companies have running at the moment so it is difficult to say what situation you may experience. But here are a few examples.
a) Write a convenience check for $16,000 into your bank account for a fee of just $99 and a fixed interest rate of 5.99% until the balance is paid off. This is from a recent Chase bank offer.
b) Pull cash out of your credit card as a cash advance at 18% variable rate interest with a 3% fee charged on the amount withdrawn. This is a fairly typical cash withdrawal scenario and it is very similar to hard money terms.
As you can see from these two examples, offers can vary widely. But if you have enough credit available on credit cards, you can generally get a combined deal interest rate that is much better than the hard money lender. Just be sure to keep track of all the accounts and payments so you don’t get slammed with an interest rate readjustment for a late payment. And be sure to pay them all off when you sell or refinance the property.
As you can see, there are money options out there for fixer uppers. It is just a matter of choosing the one that works the best for you in the situation that presents itself to you. After all, even with the high expense of a hard money loan, if the numbers work on the deal, the expense is just a cost of doing business to bring home a profit. If the after expense profit projection is good enough, don’t fret over "lost" profits due to high money costs.
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