Today I’m going to share how I buy real estate using none of my own money.
There are three main points I want to cover in today’s video so let’s dive right in.
📒 I Have a Strong PFS
The first point I want to make is I have a strong Personal Financial Statement.
My assets far outweigh my liabilities, my income far exceeds my expenses and I try to have a strong cash position at all times.
I’m not saying this to brag, but I’m saying it to let you know that I’m not trying to pass off as someone who started investing in real estate with zero. There are people out there who claim to have done that, I’m just not that person.
With that said, whenever I apply for a loan to buy a new property, my first move is to send the lender my personal financial statement.
Letting a lender a look into my financial position gives them comfort and confidence when funding my deals.
Based on my numbers, they know I can service the debt personally if necessary and they also have substantial recourse in case I default.
Click here if you want to download a copy of my PFS template.
🏛️ Why I Prefer To Use 100% Financing
So at this point you might be wondering, if I have money, why do I choose to use 100% Financing?
Wouldn’t it be less expensive if I put my own money in the deal?
The short answer is yes it can be less expensive to use your own money, but the long answer is it depends.
There are three factors to consider when allocating capital.
⛴️ Running a Tight Ship
The first factor is running a tight ship. Using other people’s money is a really big responsibility. With that said, I can’t afford to make a mistake in my underwriting or business plan execution, otherwise I’ll have to come out of pocket to eat any losses. When you use your own money to fund deals, you start to fudge the numbers to make them work because you're less concerned about paying yourself back than paying someone else back.
➕ Do More Deals
The second reason I like using OPM is it allows me to do more deals. My money is finite. I can only do so much or go so far with my own funds. When I invite other investors to fund my projects, my bottleneck transitions from finding funds to finding deals.
The assets I typically buy are in the 500,000 dollar range. So let’s say I have to put 15% down to acquire a property. If I use my own money, that would eat up $75K of my capital on day one. However, if I raise that 75K down payment from another investor at 8% interest, it’ll only cost me an extra $6,000 in interest per year.
🤝 Building Network
The third reason I prefer to use OPM is I’m building my authority and network by providing investors with a lucrative opportunity. I usually pay my lenders anywhere from 8-10% in simple interest. That may seem like a standard return profile, but what many people overlook is that an investment in my business is backed by a real asset that is almost always worth more than the debt associated with it.
For example, I recently bought a home for $525K and used 100% financing to acquire it. The appraised value came back at $575K. So if I default on the loan, my creditors will be able to foreclose on the property, take ownership, and then sell the property for much more than their principal loan amount. In a way, it’s in their financial interest for me to default.
💵 Mix of Hard & Private Money Lenders
The last point I want to make is probably the only reason you’re watching this video.
I’m now going to tell you exactly how I use a mix of hard and private money lenders to fund 100% of my deals.
So whenever I get a new deal under contract, I go through the same 5 step process.
Step 1: Create a Pitch Deck
My first move is to create a pitch deck. It’s a really simple powerpoint presentation that describes the who, what, when, where, and how of a deal. I include the purchase price, renovation costs, after repair value and expected time to complete the business plan.
Step 2: Share the Pitch Deck
The second step is to share the pitch deck with current and potential investors. I do that through my weekly newsletter. More often than not, people who have lent to me in the past step up to the plate to lend to me again. Finding new investors is hard, getting old lenders to invest more is much easier.
Step 3: Apply For Hard Money
After I share the pitch deck to my newsletter, I apply for a loan with two hard money lenders to compare terms. The two hard money lenders I use are Kiavi and Accolend.
There are links to both in the description down below. In my experience, Kiavi’s terms are better for investor’s with at least 5 exits in the past 36 months and Accolend’s terms are better for investors with less experience. My loan terms with Kiavi are usually 90% of purchase price for 1 point and 9% interest.
Step 4: Calculate PML Funds
Once I know how exactly much my hard money lender is going to fund, I calculate what I need from my private money lender.
Typically my private money lenders fund the down payment and one year of working capital and sometimes they’ll even fund all of the construction.
Step 5: PML Loan Package
Now the only thing left to do is send my loan package to my private money lender.
I secure their investment with three documents. A promissory note, a mortgage against the property itself, and a personal guaranty.
If you want me to make a video about these three critical documents, please leave a comment down below.
Once my docs are in a row, I obtain wiring instructions from my title company and ask my PML to wire the funds directly to the closing agent.
After we close, everyone gets their interest paid monthly and their principal balance reimbursed when I sell the property or refinance into long-term fixed rate debt. This typically happens within 12 months of acquiring the property.