Pay your friends and family
If you are new to real estate investing, one of the biggest questions you may have is, “How am I going to pay for my first deal?”
I know it was for me and Ashley when we started. Truthfully, we had no idea where we were going to get the funds to close on a house if we got an offer accepted. That’s because we were two broke kids, with a mound of student debt and no verifiable income. In other words, we had absolutely no hope of receiving any kind of traditional mortgage for a personal home, much less get a loan from a bank for an investment property.
That turned out to be a not-so-bad thing because we had to learn how to buy houses without banks. And when I say without banks, I mean that in the 11 years that we have been full-time real estate investors, we have never had a bank loan in our name.
That sounds crazy, right? Here is something else that’s crazy: we have only applied for one mortgage ever.
It was in 2020 when we were expecting baby number three. We already owned the house in our flip company, but wanted to buy it personally to live in. It was going to make the flip company some money and we would buy it at a discount so there would be plenty of equity to make it safe for the bank. We contacted the mortgage broker we use for our buyers, got her all the information and … we got denied. You see, real estate investors have a lot of write-offs for tax purposes when they have rental properties. This brought our taxable income down to a point that we could not qualify for a mortgage.
So to this day, we still have never had a traditional mortgage in our name.
Now you may be asking yourself how in the world we have been able to buy houses to both fix and flip and keep as rental and never had a mortgage. And the answer is, we use something called a private money lender.
Private money lenders are individuals who have money sitting in a retirement account like a Roth IRA or 401k who have the ability to invest in things other than the stock market. These types of accounts are often called self-directed because the individual gets to decide what type of investment they put their money into.
Our lenders like to invest with us because their investment is backed by real estate. That’s different than investing in a stock where if the company folds, your investment becomes worthless.
With real estate, if we default, our lenders can foreclose and get the house at the end. They can then rent it themselves and receive income or sell it to regain their money. That makes for a very comfortable deal with an asset our lenders understand and feel safe with.
Now you may be asking the question of how you find private lenders. And the answer is there are all kinds of ways.
The first place we found private lenders was at our local real estate investor association, or REIA. They attend those meetings regularly looking for people to invest with. These lenders already understand real estate, the process of setting up a loan and how to secure it properly. So they’re a wealth of knowledge and experience as a lender.
I have seen people post on social media looking for lenders. They will often post a picture of the deal they need funded, give details about it and say what they can pay. We have never gone that route, but it isn’t a bad idea.
What we did that was similar was to do an email blast of everyone in our address books that we thought may be interested. We would send a picture of a deal, tell the after repair value of the house, what it would rent for, how much we needed, how much we could pay and just ask if they or anyone they knew was interested in this kind of return.
We were quite surprised. We had mostly family and friends reach out to us wanting to get involved. And we were delighted to help. (As a side note, you never know where lenders will show up. One time we had someone we were doing an owner finance deal on a mobile home with ask us if they could invest with us. He had a retirement account he needed to grow, and we were able to help.)
Since I’ve never been able to get a mortgage, I think working with private money lenders is much easier than banks. I’ve had funding in less than 24 hours before, the people look at the asset and not just your tax returns, and you can actually call and talk to them to know if it’s a done deal or if you need to look somewhere else.
But the coolest part of working with private money lenders is you are growing the retirement accounts of your friends and family. You’re not paying some cooperation, which uses fractional lending and can fold if their bonds didn’t perform like they were supposed to because of interest rate hikes. You’re paying your friends and family.
In 2022 we discovered that we paid over $94,000 in interest into the retirement accounts of real people that we know and love. And that’s a really good feeling. So, if you are wondering how to pay for your first, or next deal, consider paying your friends and family.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.