Investing in real estate involves a lot of money. Most people, at least when they get started, don't have a lot of money. Many times the first thought is to go to the local financial institution and fill out reams of paperwork after gathering tax papers for the last fifty years and any other documents the whimsy of the underwriter may require.
This may work for one to several deals if your credit and income give the broke guy sitting on the other side of the desk looking good and smelling good likes you. However eventually you will run out of favor as there are only so many mortgage notes they will let you have open at one time. So is going through a financial colonoscopy with your hat in your hands the best way to acquire real estate?
It depends on your financial situation, your ambition and your tolerance for pain. There are better ways to get the job done. They revolve around your ability, which can be acquired, to deal with people. It will help if your life reflects honesty and integrity. If you have acquired a reputation as a shyster you will probably have a harder time. Although there are sharks in this business that will be only too happy to loan you funds in the expectation that you will default and they will take over your project.
So where do you find financing outside the amazing edifices of the stead banking community? It may surprise you to know that there are people, probably in your own neighborhood, with hundreds of thousands of dollars sitting in underperforming IRAs, 401Ks and other retirement plans. Every time you go into your local bank you see their promotions for their CDs. But you look into them, you come away with the conclusion that a Willie Nelson CD is a better investment.
As I write this Bank of America is offering a “Featured account” yielding up to .95% with a minimum deposit of $10,000. For the poor shlub who can't put out that much into their vault, they offer a “Standard account” with a yield up to .5%. Terms and conditions such as early withdrawal penalties not only may, but do apply. Neither one is even 1 per cent – and they have the gall to call some of them high yield.
Some people will say they do it because their money is secure as they watch it lose value year after year because the growth is nowhere near the rate of inflation. You can do something better for them... if they trust you AND you can provide security.
The security you provide is the property itself. Other than a reputation as a square shooter, there is usually no personal financial evaluation, the security is the equity in the property. The idea that if things go badly the loan is secured. If you are unknown to the lender or have had issues in the past, they may require additional security like a lien (if you are in a lien state) on another piece of property. The flip side of this is that if things go badly which rarely happens if you do your homework, it's bad form to make them foreclose on the property, just sign the place over to them. This will help your reputation as one who has the integrity to admit a mistake and not pass the cost on to someone else unnecessarily. But try not to let this happen.
Where do you find these angel investors? These are people who have at least a mild understanding of the potential of real estate and would rather have their money do the work instead of them donning a pair of coveralls and swinging the hammer themselves. Some may be people you already know, friends, neighbors, club members, church members. Some you connect with at investor meetings. A Google search should let you know what, if anything, is going on in your area. Some investors I know have a line on the back of their business cards that says: Ask me how to get higher than bank rate return on your savings.
When you find people that want to invest with you, having the proper paperwork is important to protect both you and your investor. Since having an attorney on your team – in general this is good because you don't know what you don't know – it will cost a few hundred dollars for them to prepare the mortgage and note... if you are in a mortgage state. I am not a lawyer and I have never played one on TV which is why I strongly suggest getting the things done cleanly as they are required in your area. It is cheaper in the long run and shows you are a professional to your lender. Your attorney will also fill you in on the filling requirements and anything else you may need to know.
For more information than we can put in this brief post, I highly recommend checking out Jay Conner, the Private Money Authority. He has refined this process to a science and will give you information your friendly neighborhood bankster would rather not have you know.
One last thought – You may already be sitting on sufficient cash to get you rolling in real estate. You can't do much with regular IRAs and 401Ks you left at past jobs, but by putting them into a self directed IRA you can use it to begin building your real estate portfolio and have the profits accumulate tax free or tax deferred. Just something to think about. The good folks at Advanta IRA can fill you in on the details.