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Hey ,
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If you’ve run out of money for your deals, today’s newsletter is for you. When I figured out how to never worry about funding my deals again, my business was forever changed.
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Inside the Trenches
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We hear the term "Other People's Money" (OPM) all the time in real estate.
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We also hear "if the deals great, then the money will come"…or "find a great deal and you'll find the money."
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Despite all these fancy phrases, it’s not as easy as it sounds.
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Finding an amazing deal is just the beginning, but if you don’t tell anyone, the money won't magically appear. Without already having connections to lenders or investors, you'll be in a rush to figure out who to talk to. Even with a great deal, failing to prove how great of a deal it is to others will make it tough to secure money. And, if your reputation is a mess, you'll have a harder time than most.
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There are MANY ways to structure a deal financially with Other People’s Money, expanding your resources to buy deals…
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But first, I want to remind everyone that there are only three things you need in order to make a deal work:
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Time: Someone has to put time into the deal, and it’s going to be yours or someone else’s.
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Money: Someone(s) has to pay for the deal, no money down doesn't actually mean "no money," someone is paying — someone is putting up the capital.
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Expertise: Someone has to have the skill to not only source a great deal, but also manage the deal and get it stabilized and/or dispositioned in order to turn a profit.
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The best part of these three necessary things to make a deal happen...you personally don't have to be the one that does all three.
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You can mix and match these three things any which way in a deal, and each one’s value completely depends on the deal itself and those partnered in it.
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So how did I forever change my business?
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Early on in my business, I only contributed "time" into the deal. My partners had the expertise and then lenders with private money put up the capital…
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Then, I had all the expertise in the deal and the time (and later my team), but someone else put up the money. (Today, I still do the expertise and sometimes even do deals now where I am just the money.)
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My business got to a point where we could find plenty of 'deals' and manage most we found, but we constantly ran out of capital to buy more…
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When this happened, the question we had to ask ourselves was "do we pass on all these other deals because we are out of capital? Or do we figure out how to get more capital?" Simple enough question, right?
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There comes a time in most of our careers, the longer we are in this business and the more success we have, that everyone will run into the need for more capital…
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And leveraging Other People’s Money allowed us to keep buying.
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Here are a few common ways to use OPM to structure and fund deals so you can buy more:
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Joint Venture: This is where you partner with someone or multiple people to get a deal done and then split "equity" and profit in that deal, so long as it goes well. It’s a fantastic way to make deals happen. One of the best parts of real estate is that you can go into business with someone on ONE DEAL and not actually have to merge businesses together.
Outside of real estate, if you wanted to partner with someone in business, you would have to merge companies and/or start a business together. In real estate, you can just buy one deal together, finish the deal up, and close out the Joint Venture.
It’s great. Remember though, you're giving away equity — BUT 50% of something is better than 100% of nothing.
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Private Money Lenders: This is where you borrow money from a private person (not a bank or professional lender), give them a note and deed of trust (or whatever your state calls it), secure it with real property, and typically pay a interest rate with maybe some points on the loan. This is one of my favorite ways to partner with someone.
The biggest thing here is trust — if the private lender trusts that you will pay them back, then they will invest with you. I personally provide personal guarantees to my private lenders, as well as secure their money on the property. Do you have to do this? Depends if the PML requires it or not, but even if they don’t, it’s still something I do. My reputation is everything to me in this business, I will always pay them back. This goes a VERY LONG WAY in this industry.
Downside? Unlike a JV where you share the risk of the deal, with a PML you are taking on the risk and owe the money back even if you lose money on the deal.
I am always looking to network and talk with people interested in being a private lender for my personal deals, and/or would like to invest with me. If you are interested, please click here and let me know.
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Hard Money Lenders: Without Hard Money Lenders, there would be very few house flippers out there. These guys are the back bone of the lending arm for most house flippers and single family investors.
Not all hard money lenders are alike, so it’s important to network and shop around. Typically you will put 10-20% down payment, but the construction costs will be taken care of as part of the loan. These loans are always higher interest rates and points than a traditional lender, but thats because the HML is taking on more risk — and you’re often included in that calculation.
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Combination of all of the above: This is where things get creative. There have been plenty of times where I have done a JV deal with someone where we also used a Hard Money Lender. I would have 80%+ of the purchase/rehab through the HML and then the JV partner would put up the remaining money for the down payment and float the rest of the out of pocket costs. I've also used HML on a first position and a PML on a second (subject to the HML allowing this). I've also done JV's with someone AND had a PML on the deal too.
There are many ways to make this happen, just make sure the paperwork is correct and that all parties know what is happening.
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Creative financing/subject to/etc: There is a whole world here. It's not my world though. Friends of mine teach this and are better than me at it.
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Ultimately, my business changed when I discovered this one thing: finding money is SO easy if you separate yourself from the amateurs and hobbyists of this business, and become a professional.
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Does that mean you need to be full time and have a staff? Nope, not at all.
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It means being able to show someone how you run a real business…
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…that you are professional in what you do
…that you can prove your numbers
…and that you have a process to manage your deals.
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It means that you can prove to them you aren't 'messing around' with this business and that you have the skills and ability to get them their money back.
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This is how you build your reputation, making funding your deals that much easier.
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I have so many stories and examples to share on this, and I will over time. This newsletter has been longer than most but I hope it was worth the read. Let me know your thoughts.
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Announcements
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Do you have extra capital and want to possibly invest with me on a future deal? Click here and let me know.
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Talk soon,
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Tarl
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