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in Real Estate Investing · November 19, 2020

Using Other People’s Money to Buy Real Estate Investments

We officially became real estate investors in May 2019 and I can’t believe how much we have learned along the way! It’s been quite an adventure, but so worth it. Each deal takes us to the next level. In our deal, Big Horn, we learned the power of private money. In all of the real estate books and blogs, you read a lot about using private lenders as a creative financing strategy to buy real estate with no money down, but that’s easier said than done. You are asking people to trust you with their money and let’s face it, how many people in your circle would be willing to lend several thousands to a new real estate investor? Now, I am not saying it’s impossible, but it requires some work. So, how did we pull this off?

After seeing what were doing with our real estate investments, we peaked the interest of some of Ryan’s friends. They were looking to diversify their investment portfolio and increase their passive income. They had cash sitting in a bank account earning pretty much nothing. Ryan mentioned how much we were willing to pay and they wanted to participate. At the time, we needed funds to purchase the Big Horn property cash and we already had $100,000 in personal loans with SOFI and Wells Fargo. We didn’t have much capacity to borrow using the conventional loans. It would also be too expensive, so we offered Ryan’s friend 12% APR with monthly interest only payments. This came out to be $200 per month. While 12% may seem high, this was better than the 15% APR loan with a $1,100 payment that SOFI was offering us. Also, these are short term loans (3-6 months), so we are compensating our lenders for this. On longer term loans, terms would likely be a little different.

In order to provide comfort to our friend and protect us all, we made sure to sign a formal lending agreement with personal guarantees. Ryan and I have various personal assets, high paying jobs and a good reputation which gave our lender friend comfort that he would be able to collect his money.

Given that this was our first time handling this type of transaction, we had to engage our attorney, Bryant Taylor, to help. They drafted a customized loan agreement template that we could use for all future transactions with private lenders.

Once the agreement was signed, we got ourselves our first $20,000 private money loan. Our friend got $200 a month and we got to buy the Big Horn property cash. It was a win-win. The best part is that friend number 2 then wanted to lend us an additional $15,000! The great thing about these private loans is that they do not show up on our credit report which helps us keep our credit score on point for mortgage applications and other business loans. Because these loans are structured to have only monthly interest payments, it also makes our monthly obligation much lower and sustainable while we are renovating the properties. Once the properties are refinanced with the bank, we can pay back our friends.

Fortunately for us, our friends didn’t want to get paid early. They preferred to keep the monthly interest payments going. Therefore, we used the proceeds of the Big Horn refinance to pay off the outstanding SOFI and Wells Fargo personal loans. This would increase our credit availability so that we can then level up our borrowing power.

Our focus right now is to secure additional lending for future deals so that we can make cash offers. This will increase our chances of getting better deals and higher returns.

How do we manage to have and pay for all of these loans? Ryan and I have solid income from our corporate accounting jobs. We keep our personal expenses to the minimum and live off one paycheck. This leaves us with at least $5,000 a month to put towards our investments. We never touch any of the income from the properties either. It all gets reinvested. We are also always looking for ways to increase our income and decrease our expenses so that we can invest more. In addition, we have also obtained several back-up lines of credit that we only use in the event of an emergency. All of these combined allow us to take on more risk. Our financial situation wasn’t as great when we started out, but as we’ve evolved we’ve had to make some trade-offs to be able to put us in the position we are in today.

2021 will be an important year for us. Our goal is reach a number of units sufficient to cover $5,000 net cash flow assuming no mortgages. We will then take a break from buying real estate so that we can aggressively pay down debt.

As you can see, the books, the blogs and real estate gurus were right. Creative financing is possible, but it might take some time before you can build a relationship with a private lender to take full advantage of this strategy. However, it never hurts to ask friends and family to see if they are interested in helping you launch your real estate investing career and make some money along the way.

On a final note, make sure to incorporate the additional cost of borrowing private money in your property analysis. Meaning that you should include the interest payments to private lenders in the calculations of your returns. You may realize that the cost of borrowing would make the deal unprofitable. This is key! You don’t want borrow more than the deal can afford.

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This post may contain affiliate links. I may get commissions for purchases made through links in this blog.

Previous Post: « Trust the Process – Wealth is not Built Overnight.
Next Post: How I used sinking funds to buy Gifts without killing the budget »

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  1. Shanice says

    November 21, 2020 at 4:07 pm

    This was extremely helpful! Thank you for sharing

    Reply

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New Blog Post 🚨 In this week’s blog post I am New Blog Post 🚨 In this week’s blog post I am going over why we bought a short-term rental, our experience so far. Plus what we did prior, during and after purchasing our first short-term rental in March 2022, a Cabin in Blue Ridge, GA.

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I can’t stress this enough. Some investors are l I can’t stress this enough. Some investors are looking to make money from day one, but that’s not always the case. It wasn’t for us and I’ve talked to a lot of rookie investors who have told me “Thank God I have my personal finance situation together.” 

This is just my opinion. Do you agree? Let me know in the comments!

Want to join a free community of like-minded individuals? Join our REI Coffee Chat Community where we talk real estate investing, personal finance and financial freedom, and much more! Link in bio @beyondjustnumbers

Want to learn more about investing in real estate? Read my blog www.beyondjustnumbers.com

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I used to think that investing in real estate was I used to think that investing in real estate was for the rich. I became in love with real estate while working for a real estate investment company that owned hundreds of units. This was back in 2011 and I was 20 years old at the time. I had less than 5 years permanently living the US, so I had no idea about anything. I grew up in Colombia and the only talk of money we ever had was the lack of it. 

The investors I worked for were a wealthy family, so naturally, I thought… Real Estate requires wealth. I don’t have wealth. Therefore, I cannot invest. 

I figured… well shit, I need become wealthy so I can invest in real estate. Eventually, after educating myself I realized how wrong I had it. You can build wealth BY INVESTING in real estate.

Took me a couple of years to figure it all out. Hence, why I didn’t start investing until 2019. I wish I had figured out earlier, but it is what it is. In just 3 years of investing in real estate, I was able to accumulate more wealth than I ever thought possible. 

Just to give you an idea…Did you know you could invest in real estate with as little at 3.5% of the purchase price? For a $150,000, that’s only $5,750. Buy a duplex that needs a little bit of work, fix it up, rent one side and live in the other. This will reduce your monthly expenses significantly, save the money and do it all over again.*

Of course it’s not that simple, but it’s also not that difficult. There are some particular steps and considerations which is  why I recommend doing further reading on the subject. 

Book Recommendation:
✅“The House Hacking Strategy” by Craig Curelop and ✅“Investing in Real Estate with No (and Low) Money Down” by Brandon Turner. 

#realestate #realestateinvesting
🚨 New Blog Post! Continuing the “Getting Star 🚨 New Blog Post! Continuing the “Getting Started in Real Estate Series” 

You’ve found a property either on your own or through a realtor, you’ve run your numbers, you’ve got a lender and now you are ready to make an offer. What’s next?

In this post I want to discuss a few items:

✅Key components of a real estate contract
✅How do you make a compelling offer to ensure you get the property you want
✅The main contract contingencies and how they work
✅Communicating with your realtor

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We see a lot of advice around hiring a real estate We see a lot of advice around hiring a real estate friendly CPA. However, when you look up  CPAs that specialize in real estate, they can be pricey.  However, that doesn’t mean that other CPAs or tax professionals aren’t good. They might not be particularly aware of certain items, but they can research and collaborate with theirs peers. Perhaps it may require you to do a little of work to compensate. Things you can do:
✅ listen to The Real Estate CPA podcast or join the Facebook group
✅follow social media accounts of the pricey Real Estate CPA and take notes of what they are saying
✅attend free educational events 
✅read BiggerPocket book on Real Estate taxes 
✅if you know anyone working with a really good Real Estate CPA firm, ask them what they are doing

Then use that to go your CPA or tax professional and be like “Hey, is this something we can do for me?” They’ll probably say, “Let me look into it”. 

If they are good, they are going to research it and/or ask their CPA peer group. (CPAs and tax preparers also have Facebook groups where they collaborate with each other).

Here is a piece of advice, if they tell you “No, we can’t use this loophole or no, you don’t qualify to use this strategy” —> Ask WHY and “How can I qualify in the future?.” This way you confirm they did their homework and aren’t just being lazy. Don’t just take no for an answer. You can then get a second opinion by asking a question in a forum or to your peers.

So don’t panic if you don’t have a real estate CPA or tax professional. 

Next video I’ll be answering the question… “Can I skip the tax professional altogether and do my own taxes?”

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