The most common question I get is: 'How did I scale to 30 homes in 1 year?'
"You must have had a lot of capital"
A funny lie of real estate is believing that having no capital or no loan qualification is a blocker.
Real estate is unique, and there are a ton of creative ways to put a deal together.
When I was studying RE investing early on, the atomic insight for me was how easy it was to access capital, unlike other instruments.
This insight fed my strategy.
But sadly, many aren't aware or don't pick up on it and throw the towel in when the bank denies the loan or when capital is a constraint.
RE investing is income-producing, which by default draws SAVVY investors. Capital providers and institutions alike love cash-flowing (profitable) businesses.
For example - Does Bank of America loan you money to invest in their own stock? Does it loan you money to invest in startups? But they will for cash-producing businesses. And, RE investing is nothing but just another operating business.
The point is that RE investing is distinctive. You don't need to have a lot of capital - you just need ACCESS to capital when you find a good deal.
This post is the synthesis of some uncommon creative financing strategies. 99% of investors I have talked to(and I have talked to hundreds of them) sadly don’t know these levers they can pull.
Anyways, let’s expand.
The problem space is three-fold 👀
- When an investor cannot qualify for a conventional loan
- When an investor does not have the money for the downpayment
- When an investor is trying to scale quickly but is out of dry powder
And the solutions could be distilled into 4 different buckets as below.
- Using equity from your other assets
- Using unconventional lending institutions
- Get creative with the seller
- Use other people's money
Quick disclaimer: My intention here is to just give options for consideration. Please understand the risks of any option before moving ahead with one.
Let’s dive in:
Category 1 - Using Equity from your other assets
A very popular option where you tap into an existing property that has increased in value. A cash-out refinance replaces your current loan with a new larger loan, paying you the delta between the new loan & what you owed on the previous mortgage.
E.g., your home is valued at $200,000, and your mortgage balance is $100,000, giving you $100,000 of equity in your home. You could refinance(get a new loan) your $100,000 loan balance for $150,000 and receive $50,000 in cash at closing.
Risks to consider - your mortgage restarts as you are getting a new loan. - your cash return could get dented as your new loan payment will be higher, so make sure the strategy aligns with your goals. Also, the interest on a cash-out refinance is tax-deductible.🙌🏼
Home equity loan
A home equity loan(not HELOC) = equity loan = home equity installment loan = second mortgage. A not-so-popular option, these loans allow property owners to BORROW against the equity in their existing property.
The loan amount is based on the difference between the home’s current market value and the mortgage balance due. The home equity loan is typically taken out at once and paid back in installments until it is paid off. The interest rate and payment are generally fixed.
Home equity line of credit(HELOC)
HELOC is again a popular option if you have an existing property with equity. The loan amount is again based on the difference between the home’s current market value and the mortgage balance due.
Most banks will loan 85% - 95% of an existing property's value with a line of credit. Eg, if the property is valued at $100,000 & you owe $75,000 on the current mortgage, you could potentially receive a line of credit with $20,000 (95% of the home’s value) to draw from.
Note: Unlike a cash-out refinance, with a home equity loan and home equity line of credit, you don’t pay off the original mortgage. Instead, you borrow against the value of your home. Just be careful; when you use an equity loan or HELOC, your home becomes the leverage.
Another rare way to receive a line of credit is via a regular stock investment account. These are non-retirement accounts, and there is a minimum balance rule to open a line of credit. The account is used as collateral against the loan.
Since this asset is pretty liquid, the line of credit tends to have a good interest rate. As the investment account balance increases or decreases, the limit available on the line of credit can also fluctuate, which is something to watch out for.
Self-directed IRA or Solo 401k(popular)
Investors might have an IRA or an old employer 401(k). This retirement account can be repurposed as an SD-IRA or a solo 401k. Now those funds can be used to invest in real estate, and you are not just limited to just stocks, etc.
But note, since this is a retirement account, all the returns go back to the account, and there are rules, so this option needs diligence. I paid a lawyer to set up a solo 401k, which I used to invest in startups since I wasn't planning on seeing that money for years anyways.
401(k) plans usually offer a loan where borrowers can take money from it but must pay it back. There is no tax/penalty as it is a loan & the borrower is not taking the money as income. Payments are carried out of your paycheck & applied to your 401(k)
Another lesser-known way of making a down payment. If you have your car etc paid off, that’s great. Not only do you not have a car payment, but you also have a lendable vehicle that you can use to purchase a property.
Some banks will take the title of your paid-off car and use it as collateral or lend you the cash to make that down payment. Remember to add your new car payment into your investment property analysis as an expense.
Category 2 - Using unconventional lenders
FHA loans are popular and perfect for first-time buyers who don’t qualify for a traditional loan. Technically still a conventional loan, this loan allows those with credit scores of > 580 to pay as little as 3.5 percent for a down payment.
This option has some fees, so make sure you run your numbers A combo strategy to explore here is house hacking combined with an FHA loan. You can live in one unit and rent others.
Interest only loans
The interest-only loan is a popular way to purchase, rehab, and sell properties quickly.
With this loan, you will have enough to get started on your renovations while still making payments at the beginning of each month.
When you profit out on the sale, you can pay off the loan in full, having paid only a small amount of interest.
It's a riskier option in inflationary climates, so make sure not to overextend.
These work like mortgages from a bank, but since the lender is an independent entity, they can follow different guidelines for lending. Interest rates are often higher, but this creative mortgage technique allows more borrowers to qualify for a loan.
Hard money is a popular option because the qualification is always asset-based — which means that the lender will review the subject property to decide on the loan rather than the creditworthiness of the borrower.
The flip side is that the interest rate is higher.
In addition to the more straightforward approval process, access to funds is much faster than with a conventional loan. Be sure to have an exit strategy or two before taking on the loan, especially in an elastic climate.
It stands for a short-term, asset-backed bridge loan and is very similar to a hard money loan in that the loan is asset-based and secured by a mortgage.
These loans typically act as “bridge” loans meaning you are getting a short-term loan now only to replace it with a long-term loan. Usually, an investor will use this loan to secure a purchase with the intent to cash out of the deal in less than 12 months.
This option is good for fix-n-flip because it allows the buyer to use the lender’s money to fund the purchase while their money can fund the renovations.
And when the property is remodeled and sold, the buyer can pay off the loan.
Some investors have this as a repeat strategy to scale.
Credit Card Advance
This is a riskier option, but it is an option - I have read a few have done this. Although you are paying a higher amount for interest on a cash advance, you may be able to transfer that balance to another credit card at 0% interest for a certain term.
Please use this strategy with caution. It's an easy way to access quick cash, it’s also an easy way to rack up hefty interest payments and increase your debt-to-income ratio. Make sure you pay your credit card off with the proceeds, not buy a new car. 🙂
Category 3 - Get creative with the seller
Seller Second Mortgages
If you cannot obtain a loan for the total price of the property, you can ask the seller to loan you the rest. In this case, the bank mortgage pays the seller for the bulk of the amount owed (for example, 80 percent)
The seller then deeds the property to you in exchange for a promissory note(just a loan document) for the amount of the balance remaining (in this example, 20 percent).
Seller or Owner Financing or Seller Carry Back
This is another innovative and popular way that, sadly many don't even know about. The seller of the property agrees to finance the property outright instead of a bank.
They transfer the title to you in exchange for a promissory note and deed of trust for the full purchase price of the property. Seller financing is one of the easiest ways to acquire an investment property without any banks or lenders.
In some instances, you may be able to enter into the agreement with no down payment, essentially acquiring the property for zero dollars.
Contract for deed
Similar to seller financing, a contract for deed is another method of owner-financing. The difference under a contract for deed is that the seller retains title to the property until the mortgage has been paid in full.
Lease Options or Rent To Own
A lease option allows you to rent the property for a given amount of time, with a portion of the rent credited toward the purchase price of the home.
At the end of the lease, you have the option to purchase the property at the amount agreed upon when the lease was created. There are even startups disrupting this model now.
Master lease with an option to buy later:
It's similar to rental arbitrage. Imagine a seller is burned out, and you tell them you will lease the property for 5 years for the same rent they receive now. The deal structure is only limited to your creativity.
Example: You can offer to perform immediate cosmetic repairs like painting and carpeting that will cost $5,000. You are also responsible for all vacancy costs, turnover costs, maintenance costs, etc.
The owner will continue to pay for taxes and insurance and handle any major capital expenses (roof, heat and air systems, structural issues). Your lease gives you the right to sublease all four units to sub-tenants, you can increase the rents and pocket the delta.
Stacking up a few deals like this could make for a very lucrative side income for you and then at the end of 5 years you can just buy the property out.
Master lease + option (with a credit partner)
This tactic will provide a different way to use the previous technique. Instead of leasing the property from a seller, you can get a credit partner who takes on the loan. Let's take an example
You find a great rental property deal worth $150k that can be bought for $100k You don't have the money to close. You ask a friend with excellent credit to get a loan. You agree to the following 1. Your friend gets a loan for $80k and puts in the downpayment of 20k.
you master lease the property for five years at $500 per month net-net-net rent. You pay all expenses. You also require an option to repurchase at a higher price ($110,000).
You then rent to a sub-tenant for $1,200 per month. Your net income looks something like this: $1,200 – $500 (operating expenses) – $525 (rent) = $175 per month net income
While $175 seems like a nice cash flow, You won't make much after keeping reserves but you get time to buy the property in a couple of years. Meanwhile, your friend uses the $525 rent to pay his $425 mortgage payment, and he still has $100 leftover to put in his pocket.
This one is simple. If you can find a seller who needs to sell a property quickly and has financing in place, you can assume the seller's payments, often with little or no down payment.
A short sale is when a seller markets the property for less than the amount owed against it. The bank agrees to cut its losses & accept that amount as payment in full. This is often done by the seller to avoid the credit implications & costs of foreclosure
Purchasing short sales allows you to purchase property at a discounted price. The resulting immediate equity in the property makes this a great strategy if you can find such deals with more time commitment.
Category 4 - Use other people money
Private Money Loan
Simply said, a wealthy person lends you the capital. Eg - I usually qualify for loans but sometimes will use money from friends to pump the down payment. It doesn't have to be friends if you can hustle to get in touch with some HNW people.
You can just get a loan for a fixed interest rate. Last year, I got a loan from a friend for 100k paying him 11% in annual interest. 3.5% every year and the rest 7.5% when I sell in 3-4 years. Meanwhile, I make all the 14% cash return through the years.
This has been my favorite option because I can play into my network. There are many options but I suggest the crawl, walk then run approach. As part of the partnership, you may find the deal, manage the deal, or provide the knowledge or experience.
For equity, the partner puts in the money needed to purchase the deal. This is a very common way to scale by using other people’s money. As you scale, you can do syndicates and private equity funds. If you observe closely this is where most prolific investors end up.
Platforms like GoFundMe and Kickstarter authorize users to raise money for anything they want. More specifically Hatch My House and Feather The Nest are platforms designed just for real estate. Make your case to the public, and wait for funds to roll in
That's it, folks! To bring it home, the main insight here is that 'I don't have the capital or I can't qualify for a loan is not a blocker. These strategies are not new and many investors are pursuing these creative ways to keep going. And so can you!
There is always a solution & for a 'no capital' problem, there are many solutions in RE. The only impediment is the ceiling you put on your hustle & creativity.
All this said, I do urge you to have the right foundation and do a cost/benefit/risk analysis before pursuing any option