Before going into debt to buy real estate as an asset, you need to get your finances in order. What that means is figuring out: Where can you get the money to pay for your real estate investment? There are lots of choices out there, actually.
Most people think that if you want to invest in a real estate property you have to have all your debts paid for, have money in the bank in case emergencies come up (like vacancies and repairs), and just have leftover cash laying around. That is not the case. In fact, I know very, very, very few investors in that situation. Most have more debt that they know what to do with, but it’s a good debt.
Getting a Mortgage
The first involves going to the bank and getting a mortgage for the property. This seems like a no-brainer, but believe it or not, it’s not always the easiest way to buy a property. The way this works is you go to the bank and they qualify you based on your credit. But with an investment property, they also qualify you based on what your tenant is going to be paying you.
The difficulty with this method is that if you are buying a property that’s vacant, you of course do not have a tenant. That means that the bank will not look at this as an asset, but as a liability against you because you’re taking on additional expenses that you are responsible for – so you will need to be able to afford paying for that.
Also another reason you may not want to get a loan or mortgage on the property is if you need to do a substantial amount of repairs. By spending the money on repairs after you purchase the property, you have no way of financing those repair costs with the loan. To recoup the money you would need to refinance, roll the costs back into the loan, and get the money back out.
Another way to purchase would be, of course, cash. You’re probably thinking, “Well, no duh. If I had a bunch of cash, I would go buy it, so why would I even need to talk about a mortgage?”
While we don’t always have cash at hand, we may have a way of getting it and not know it. For instance, if you played the credit game before and you have credit cards, I would highly recommend that you start thinking in a new direction.
Credit cards, for me, are 100% for emergency funds or for buying properties. I don’t use them for anything other than that. What I mean is, I have credit cards that I’ve never swiped through a machine. The only reason I have them is to take money off of them, deposit it into my account, and go buy a property.
I have bought properties as cheap as $7,500 on credit cards before. Yes, seven thousand, five hundred dollars. We put $40,000 worth of improvements into it, but sold it for $75,000, so that was still a pretty substantial profit.
If you have the ability to get a cash advance, that maybe the best option. A lot of credit card companies will directly deposit the money into your checking account. Whatever you can do to get the lowest interest rate and get the money as soon as you need it, that’s the key here.
I do not use my credit cards for my everyday living expenses. The only charges I put on them is when I need to purchase a real estate property or when I am doing repairs to the real estate property. I take the money off the credit card, put it in my bank, and go buy the property. Then a few months later, after it’s all settled and I have a tenant in there with a lease, I go to the bank and say, “I want to finance this property that I own outright.” I also explain to the bank that the credit card debt associated with it is for that property.
Sometimes the bank wants to pay the credit cards directly to ensure that I’ve paid them off, which is fine with me. It saves me some stamps! Other times they want to finance it, give me the money at closing, and I turn around and pay off the credit cards. Either way you play it, you have to be strict about the policy. Pay off your credit cards!
Another option for getting money to purchase properties is to start leaning on family members. You know that old Uncle Harry you haven’t seen in a couple of years? Maybe he’d be interested in doing business with you. That’s exactly what this is, a business proposition. Not that you need the money because you can’t pay the bills, or can’t put food on the table, or because little Susie want to take dance lessons. This is purely an investment, so everything goes in writing.
Everything goes in writing. You can take out a loan from anywhere – the bank, credit cards, or your next door neighbor. Either way, it needs to be legit and in writing to spell everything out and make it very clear.
You would be surprised how many people you know who might be willing to do this. I know doctors, lawyers, and others who are financially stable who feel very comfortable doing this because you start out in small amounts – you start making payments, you finance the property a few months later, and then you pay them off. (In the end I always pay interest on my loans no matter where the loan comes from so no matter who they are, they are always making money.)
When I purchased my first property, I ha credit card debt, I had a job in a new career that was costing me money, and I had kids I put in daycare to go start this career. So, I didn’t have any ground to stand on if I went to the bank to say, “Hey look, I qualify for a loan,” because I didn’t have any money or income history. Instead, I asked around and found a Realtor® who knew of someone interested in holding private financing. That’s who you’re looking for!
Private financing is where an individual loans the money to you instead of a bank. You pay them interest on a signed mortgage against the property and then, when you refinance or sell it, they get paid off. They’re highly protected, your interest is protected, everything is in writing, and it’s clear and legit.
Basically, instead of paying Big Bank USA, you’re paying an individual party.