Conventional

For buyers with a good to excellent credit score, a mortgage broker or lender will usually make a loan up to 80-90%, possibly including closing costs. Rates are good, typically 5-7%. This is normally a 15 or 30 year FIXED note, such as when you are a buying a HOME for yourself. Lenders can make several (usually up to 4) loans towards investment properties. Definitely a very low-cost method of borrowing. Some disadvantages, however ... lenders who make conventional loans don't usually like foundation problems (I like them!) and sometimes won't include the money for rehabbing the property. This leaves the investor to find the money for materials, labor etc. However, if you are buying RIGHT (remember 50-65% of ARV) then the lender may allow up to 20% or so to be included for the rehab. Most likely, this will be in the form of a "drawdown". The lender retains the 20% until you have completed SOME of the rehab. You then request, say 5% if a quarter of the work has been done. The bank may send out an inspector just to verify the work has been done. They sometimes charge a fee of between $50-$150. It's all about cash-flow, really. If you can put materials on a credit card and get the drawdown before you have to pay the laborers then everything should work out. At the completion of the rehab you should have all the drawdowns covering the materials and labor. Don't forget to pay off the credit card, unless you want to carry that debt until the property is sold. Actually, that sometimes helps because your drawdown dollars can go toward your monthly holding costs. This means you should be virtually zero out of pocket, except maybe for initial closing costs, utilities etc. The big advantage to a conventional loan is your monthly holding costs will be fairly low, certainly compared to a hard money loan.

Line of Credit

 Definitely my favorite form of financing for this business! The best source for an LOC is a small bank (not a big National bank - you know the ones). The reason for this is decisions are made "in-house" and not some manager in another state who has never met you nor really knows your business. A local bank manager can actually go see the properties you are wanting to buy and renovate. It's a REAL "bricks/mortar" business best seen in the flesh. Write up a scope of work describing what you intend to do to the property to "force the equity" and sell it at a profit. Write up the actual material costs, and projected labor costs. Show that you have a reasonable plan to get it done in 3-4 weeks, and a plan to get it sold within 60-90 days. Show your holding costs, selling closing costs and a projected GPM (gross profit margin). Remember, a bank manager wants to see the numbers. Be realistic, but optimistic! Bank managers like to work with folks who have a real belief in their business. Treat it as a real business!! Most likely, if you ask for 500,000 to $1m it will show that you are intending to make a real go of it. The bank may offer to lend you an amount equal to the first property including rehab costs. Once you have proven you are capable of buying a deal and selling at a profit, then more funds may become available very quickly. Our bank has only one branch! We meet with the bank manager directly responsible for real estate investments. So far, we have done 18 deals with the bank in two years and have all been profitable. A big advantage of a LOC is that drawdowns are fairly automatic. We email material and labor costs and usually within 2 hours the money is in our account! Closing is easier too. Once the initial LOC documents are drawn up, the closing documents may only be 1 or 2 pages, simply adding the property to the portfolio contained within the LOC. Each time we sell a property, the proceeds pay off the amount associated with that property, and then it frees up dollars to buy the next one.

HARD MONEY

(to be continued)

"CASH"

What is CASH? (really!!). In real some estate offers I have seen, the potential buyer sometimes writes a "full" offer as "cash". Now, in fact, we have some buyers who DO bring a cashiers check for the full amount to closing. They had to provide "proof of funds"  before the offer was accepted, in the form of a bank statement or similar. Heck, in one case, a buyer offered us $25,000 cash down, $500 CASH earnest money and the rest as a loan. When they got to closing, they brought approx $25,000 IN REAL CASH (yes, greenbacks!) Our title company had NEVER experienced this. In fact the closing agent had to take the money HOME with her and guard it all night with a gun nearby!! Now, some buyers have been 'taught' on some course that to get a deal , offer CASH  and you'll have a better chance than a competing buyer who is offering 100% financing. The myth is that "hard money" is the SAME as "cash". Let me tell you right now - it's JUST NOT TRUE. Cash is King. Hard Money is NOT "cash", the "same as cash", nor "just as good as cash". Cash IS a cashiers check, or just plain cash. It sounds banal, but when you write up a cash offer with a realtor, and they present it to the seller as "cash", and it's accepted and goes into escrow (to the title company) THEN your Hard Money Lender calls asking for title work .... the seller will go berserk!! You have just fraudulently got a deal that another cash buyer would have gotten legitimately. At the best your deal may get pulled and given to the next best offer. At worse you'll lose you earnest money and your realtor will never work with you again. There may be other negative legal ramifications too. Just DON'T do it! Be up front about ALL your business dealings, including offer terms and contracts.