What is the Most Expensive Way to Finance Your Real Estate Deals?

[Corey Dutton]

During a presentation given at a local real estate investor’s club last week, a very successful real estate investor wrote a list on the white board. The list he gave was 15 different ways to finance your real estate deals. Some of these included:

1. Your own cash
2. Your partner’s cash
3. Your SEP IRA
4. Your family or friend’s cash
5. Hard money lenders
6. Bank line of credit

After writing out the list of 15 ways to finance your real estate deal, the investor then asked the group, “What is the most expensive way to finance your real estate deals?”

Of course everyone in the group said ‘hard money lenders,’ but this was the wrong answer. The correct answer to the question is actually #1, followed by #2.

But why is your own cash the most expensive way to finance your real estate deals? Consider the opportunity cost of locking up all of your own cash in one deal at a time. What if the deal goes south? By using hard money lenders to finance your real estate deals, you can do more than one deal at a time, spreading out your own precious cash across more deals.

The second most expensive way to finance your real estate deals? Number two, your partner’s cash. Unlike a hard money lender that will only take interest payments and a loan fee, a partner will take 50% or more of your profits.

If you want to be a full-time real estate investor and quit your day job, you can’t do just one deal at a time. This means you’re only getting paid every 4 months. By using hard money lenders to finance your real estate deals, you can do 4 deals at a time, which would allow you to get a paycheck every month.

Instead of using your own cash, the most expensive method to finance your real estate deals, consider using hard money lenders and spread your cash out over multiple deals.