5 Ways to Finance Your Deals

As I travel the country training real estate investors, there are two questions I get at almost every event: “Where do you find hot deals?” and “Where do I get the money to fund my deals?”

I’ve written a lot about finding hot deals. In this article, I will be revealing five ways I have previously funded deals. One of these methods is traditional, but one of the non-traditional ways is my favorite way to fund deals!

1. Public Financing

The traditional way of funding deals is by going to your local banker or a mortgage broker and taking out a loan. One advantage of this strategy is that you may get a lower interest rate than you would through other financing options. But public financing has timely entanglements that can cause you to lose out on deals.

For starters, public financing takes a long time to close. If you’re buying properties from motivated sellers, you may lose deals by not being able to close quickly. Other factors that can affect how soon a deal can close are: having your credit score come into play, being required to verify your income, and knowing appraisals are required in order to close. Plus, there’s always a limit to the number of deals you can do and the amount of money you can borrow.

2. Seller Financing

With seller financing, the seller of the property becomes the bank. You negotiate with the seller that they will hold a note and there will be a lien placed against the property you’re buying. Instead of making payments to the bank, you will make payments to the seller.

In many cases, sellers will agree to sell with no down payment. Many will also sell with no interest. This means 100% of your monthly payments will go toward the loan amount, allowing you to pay down the principal quickly. Because the seller is acting as the lender, there’s no approval process. With seller financing, neither your credit score nor your income influences the deal. There’s also no limit to the number of seller-financed deals you can purchase.

Not every owner of a property will want to sell with this method. In reviewing lead sheets from my own sellers since 2003, only 13% of the owners I contacted agreed to sell with some type of terms. Going off my data, if you are relying on seller financing to do deals, you’ll miss out on 87% of off-market deals.

3. Subject to the Existing Note

When I’m negotiating with the seller of a property who has an existing mortgage, I try to purchase the property “subject to.” This means the seller agrees to sell you their property while leaving the mortgage in their name, while you agree to make their monthly mortgage payments.

Buying subject to the existing note does not mean you’re assuming the loan. The mortgage company is not involved in negotiation or transaction. Nor are they involved in approving or denying you to buy the property “subject to.” This is simply an agreement between you and the seller.

You may be asking yourself who would sell me their property, agree to leave the mortgage in their name, and trust I’ll make the payments? Answer: A motivated seller in need of debt relief! Because there’s no lender approval process, buying “subject to” is a profitable method that will always have the lowest interest rate compared to other financing methods. You will be paying the interest rate the seller got when they took the mortgage. Just like with seller financing, there’s no limit to the number of “subject to” deals you can do.

One downside of buying “subject to” is that there is a chance the mortgage lender will take advantage of the due-on-sale clause and call the loan to be paid in full after you purchase the property. The lender has the right — but not the obligation — to do this if ownership of the property is transferred with an outstanding loan. However, it is highly unlikely that a lender will decide to call the note due.

4. Hard Money Lenders

A hard money lender is a broker of private money. They raise capital from individuals who invest in the lender’s funds. The lenders then loan money from their fund to real estate investors. A few benefits of using a hard money lender include: not having to provide verification of income, being able to close in three weeks, and enjoying a lower interest rate if you have experience on your side.

Regardless of your experience, your interest rate will always be higher than with other funding sources available to you. With hard money lenders, there’s a limit to the number of deals you can do and the amount of money you can borrow. Origination fees will also be much higher than with other sources of funding. And most importantly, most hard money lenders will only advance 80% of your purchase price, leaving you with a large 20% down payment.

5. Private Money

Using private money is my personal favorite way to fund deals. There is a long list of reasons why I love using private money, but a few advantages are: there are no appraisals needed, no verification of income is required, you can close any deal within a few days, and your credit score has nothing to do with your deals.

There are no limitations on the number of private lenders you can use or the amount of private money you can borrow. With private money, you can see an immediate increase in cash flow, and you can borrow across state lines with no bank regulations. In fact, you never have to bring out-of-pocket money to the closing table. You always receive a big check when you buy, and receive multiple checks on every single transaction.

There is a higher interest rate than when using public financing or buying a property subject to the existing note, but the rate is not nearly as high as with hard money. Of all these strategies, this method is my preferred way of funding deals. When I first started using private money to fund my deals, I raised $2,150,000 in just 90 days!

If you’d like to learn more about how you can get private money for your deals, I have a free on-demand class waiting for you. You can find it at www.jayconner.com/moneywebinar.

I’ll see you on the inside!

~ Jay Conner