11.11.2020
ONE OF A SERIES OF 30 MINUTE TOPICS THAT GET RIGHT TO THE POINT
Fix N’ Flip – Financing
Fixing or rehabilitating a property with the intent of immediately selling it to a new buyer for a profit – it’s the dream for many current and prospective real estate investors! Though not intended to be an all-inclusive guideline, this whitepaper should act as a basis for getting started in this industry and understanding “how did they do that??”
MYTH BUSTER – despite what many seminars may contend, you cannot expect to buy a “fix n’ flip” without using your own money. However, there may be avenues you haven’t considered which can make these deals more obtainable., including but not limited to:
Conventional or FHA Loan + Rehab Loans (up to 95% of the purchase price)
– SUMMARY – These loans are obtained based on your existing debt/income ratio and no different than the standard mortgage application process. Though investment properties may have slightly higher interest rates than a primary residence, rates are still much cheaper than most of the other alternatives to financing (including equity partners!);
– RISKS – these loans would require monthly mortgage payments whether you are making progress or not;
– WHAT TO DO NEXT – call your local mortgage broker and start kicking the tires on what you can reasonably afford, and costs associated with it.
Seller Financing
– SUMMARY – This applies where the Seller is willing to lend the money for the Buyer to purchase the property, typically for a short amount of time (less than 36 months) and until a certain event (i.e. buyer selling other property). Sellers just need to be convinced of your plan and timeline. At closing you would sign a Note and Security Deed securing the Seller as the new Lender. NOTE: Sellers must not owe anything at closing (i.e. existing mortgages);
– RISKS – Typically you can negotiate no monthly payments, in which case there is limited foreclosure risks during construction.
– WHAT TO DO NEXT – Don’t hesitate to ask any Seller you are negotiating with of their interest and ability to finance the deal themselves. This may allow you to offer a higher purchase price in the event you don’t have to pay additional fees to a conventional lender. This works best when a Seller might be asking too much for the property with limited Buyer interest.
Private Lender Financing (including friends and family)
– SUMMARY – This is exactly what it sounds as friends and family (even coworkers and neighbors!) are financing your transaction. This is very similar to Seller Financing as you would sign a Note and Security Deed – if you aren’t able to pay the mortgage back, the Lender can then foreclosure and take the property as collateral.
– RISKS – The terms of the Note and your agreement with the investors is key – do not lock yourself into unreasonable deadlines and budgets that would force you to lose the property before you are done with it. Additionally, Lenders could always be left with a property that is half-finished and had no intention of fixing it themselves!
– WHAT TO DO NEXT – Keep your eyes and ears open to potential investors and pitch specific opportunities to be a Lender. Be prepared to share with them the terms of the loan and your ability to deliver on your plan and timeline.
Equity Partners
– SUMMARY – Partnering with someone who can teach you the business and invest capital in your transactions is neither a good plan nor easily achievable.
o Equity partners are more expensive than lenders;
o There is a natural power struggle when things go wrong and roles are not typically defined well enough to solve these issues;
o Its not that hard to do it yourself!
– RISKS – Equity partners add a new risk profile to a deal as you now have to account for a new decision maker. Additionally, group think may start to slow you down, or you may forfeit your responsibilities to someone who isn’t yet capable to handle it without you.
– WHAT TO DO NEXT – Rent before you buy, meaning that have an interested partner lend you the money on 1 or two deals before becoming partners. Other options include seeing previous work that they’ve performed on, interviewing previous partners, and, of course, having incredibly well-written partnership agreements in advance with roles and responsibilities clearly laid out.
Hard Money Lenders
– SUMMARY – These lenders are a hybrid between private lenders (individuals) and institutional lenders. They have fewer underwriting guidelines and can be more flexible on structure, but they are typically very expensive (points, fees, and interest rates). Great option in the event you just need quick financing and you have no where else to go.
– RISKS – Foreclosure risk as in other loan deals. Must pay close attention to the fee structure.
– WHAT TO DO NEXT – See loan details above.
Self-Directed IRA
– SUMMARY – If you have an existing IRA (Traditional or Roth), you may be able to convert that money into an account for investing in Real Estate transactions. There are fees associated with hiring the IRA intermediary, and you will have to establish LLCs and operating agreements that meet their guidelines, but it could open up an incredible opportunity to access cash that you otherwise have invested in stocks and bond or annuities.
– RISKS – Though this money has not requirements on being paid back, it is your retirement we are accessing. If the deal goes sour you could lose a significant portion of your wealth.
– WHAT TO DO NEXT – Contact a Self-Directed IRA intermediary and start educating yourself on the details.
Existing Line of Credit (including HELOCs)
– SUMMARY – Using existing lines of credit may be available. This includes credit cards, home equity lines, business lines, or even loans from existing stock holdings. Typically, these arrangements require interest-only payments and are not secured by the property being purchased;
– RISKS – Though Foreclosure risk isn’t applicable, failure to pay could have disastrous effects on your credit and result in liens that would attach to the property;
– WHAT TO DO NEXT – Most HELOCs are available only through your existing bank where you are an existing client – call there first.
1031 Exchanges
– SUMMARY – Named from the Internal Revenue Code Section 1031, you may be permitted to convert an existing asset into the new purchase without incurring a capital gains tax bill. This Section allows the person to sell one property and exchange it for a “like kind property”. For example, its possibly you could sell a collectable car for a large profit and convert the proceeds into a new property without owning any taxes upon the sale.
– RISKS – Compliance with the law may be difficult and you will have to hire a 1031 Intermediary to handle the paperwork. You may also be forced to hold the property for a minimum of two (2) years before selling it.
– WHAT TO DO NEXT – Contract a 1031 Intermediary for more information.