Posts Tagged ‘No Money or Credit Investing’

Private money is different from hard money. Hard money is people who are in the business of lending money. They lend money to real estate investors on a short period of time (3-12 months), they charge a high interest rate (12% – 20%) as well as points (2-5 points) upfront. And they only lend up to 70% Loan-To-Value (LTV).

Private money on the other hand is people who are just looking to get a higher rate of return on their money that they don’t normally get somewhere else. If they have money on savings or Certificate of Deposits that are only earning  3% a year and you offer to pay them 6%, they would more likely to want to invest with you. The added benefit to them is the fact that their money is secured by real estate so they feel like they have a better control of their investment. And they don’t charge points upfront. 

Also with private money, they are not short term. They want to keep their money invested for as long as possible and don’t like to turn it over and over to where you pay them back shortly. With hard money, they like to turn it over immediately because they make money upfront plus they are earning interest.

When you work with private lender, you can design your own program that works for you. You can set your own terms whether you want 6 months or 60 months, you can set the interest rate that you want to pay 6% – 12%, whether you want to pay interest only or fully amortized, and whether you want to make monthly, quarterly, annual, interest accruing, or balloon payment. Once you decide on your private lending program, then you can match your program with the right private lender.

That’s the benefit of working with private lender versus hard money lender. You have more flexibility and you’re not subject to their own criteria. They are typically more lenient than hard money lenders and so they are much easier to work with. They don’t require credit check like most hard money lenders.

When you utilize private money in your real estate business, it allows you to take your business to a new level. It allows you to leverage other people’s money without having to use your own or use your credit. There is no limit on how many properties you can buy. Unlike banks, you are limited to the number of loans that you can get which limits your ability to buy more properties.

I am going to take a time out from my article series this week. I received an email from a person who got into real estate investing a couple of years ago practicing “No Money Down” investing. I have talked to him several times over the last year or so and yes, he got himself into a pickle.

He watched those same TV infomercials that you and I have seen late at night. He heard about this wonderful world of real estate investing with no money down. He decided it was for him. The problem is he did not educate himself. He decided that he knew enough watching those 30 minute success story shows that he could go out and do it himself.

He began by working with a real estate agent and mortgage broker. Please keep in mind that this was in a good market during 2005 to 2007. He found a typical “good deal” on the MLS that his agent “told” him was a good deal. He went to a mortgage broker who lined up a “really good” no down payment, interest only, negative amortizing loan that allowed him to roll in his closing costs. He then rented out those properties with negative cashflow.

He did this several times. Over and over again, he bought a house at full retail. Over leveraged it and then rented it out for less than his monthly payments. You know, this is a real life version of the old story that if there is enough “Gross Revenue” there has got to be some “Net Revenue” around here somewhere.
He was all set… All set for disaster that is!

Anyway, with the market change and renters not paying on time and then having to evict them; problems started. The adjustable loans began adjusting and then the financing criteria began changing, so there were no loan programs to do a “cash out” refinance. Soon he was in a bind. Long story short… he is in big trouble. He lost his credit and properties and everything else. Foreclosure and Bankruptcy, Ouch. Unfortunately this is typical in today’s real estate market.

But in his email to me he asked why I still taught “No Money or Credit” investing. Well frankly, because it works. I believe in getting trained properly to do what I am setting out to do. I don’t believe in trying to learn from a mortgage broker and real estate agent who are just trying to make commissions off of my transactions. I would rather spend $5,000 or $10,000 for training where I can multiply that same money over and over again.

If I paid that same money in commissions I only learn from that one transaction. Paying someone who has been there and done that, I learn from every transaction that the teacher has ever done as well as from the people in the audience.

I am not blaming the broker or agent for this transaction. (Well, yes I am… but really they did their job, which was selling their service to the investor. Not teaching him to be an investor.) The root of the problem was the investor. He didn’t educate himself and didn’t know enough about the endeavor to make money.

He still sees me and other people who teach successful creative real estate investing techniques as the problem rather than he who got in over his head and listened to the wrong people as the problem.  I teach “No Money or Credit” Investing. The difference is I have yet to put a mortgage into my name and I have a solid exit strategy going into the purchase of the property.

He would have been fine if he would have took it slower, found a deal and then used his buy and hold exit strategy with the proper fixed rate mortgage that allowed cashflow. The problem was he lived in Southern California and when the market tanked, so did he.

Remember there are Winners or Whiners, you choose which you want to be. Take responsibility for your own actions. He made the mess and he is cleaning it up. In a few years he will be in a position to try again. It is his choice to be a Winner rather than a Whiner!