First Time Borrowers 101

What makes a real estate investment attractive in the eyes of a lender? Is it the price in relation to market value, the cash-on-cash return, or is it the amount of risk associated? Perhaps all the above are equally important however, to a lender they do not compensate for lack of credit, liquidity, and experience.

Think of the structure of a deal like a house and every house has layers: foundation, framing, insulation, drywall, etc. As a borrower, you are the foundation and thus the most important part of the deal. Simply put, no matter how amazing a deal is on paper, without the borrower it is just sticks and bricks with potential. For example: paper-perfect deal + sub-650 credit + less than 25% down and an added 10-20% for reserves + no experience = a house built in a swamp. 

I realize that you cannot change a credit score, experience, and liquidity overnight... or can you? You found the project; you have done all the numbers and this deal is gold. Now it is time to get yourself a foundation. You have already proven that you are savvy and have an eye for profitable ventures – These are intangible skills that cannot be acquired. Use your skills to assemble a team that makes this paper-perfect deal a lender-perfect deal.

Find one or three people that make up the credit, experience, and liquidity. Create a single purpose entity with your new partners as majority owners, give up some profit for the intangibles they bring and get the deal done. In the time it takes for you to complete your first project, you will be able to get your credit up, gain experience, and put some cash in the bank. There you have it, you are now a qualified borrower.

One deal gets you recognition, two deals get you good pricing, six or more deals get you top tier pricing and maybe an exception or three if necessary.