How to Raise Money Even if You're a Newbie Investor

[Wendell De Guzman]

If you're a newbie investor, you're caught up in a classic "chicken or egg" dilemma: to get funding for your deals, you need to have real estate experience but how can you get real estate experience without access to funding?

If you're a newbie and have not done a single deal and you want to raise money so you can buy deals, below are your options. I suggest you focus on mastering one of the options at a time before moving on and trying other options. These options or choices are not arranged in any manner. How you succeed in each one depends on how hard you work, you doing further research and your determination. So here are your choices if you're a newbie:

1. Learn how to do deals without using any cash at all. Learn creative financing like buying a house "subject to", seller financing or using lease options as an entry strategy and exit strategy. @Brian Gibbons is an expert on creative financing to acquire properties. You can listen to my podcast about how I bought a house "subject to" and actually got paid to buy the house and then I turned around and sold the house on a lease with option to buy. Here's my podcast: http://Biggerpockets.com/show65

2. Learn wholesaling. This strategy involves learning how to find, analyze and then putting a good deal under contract and then assigning your contract to another investor-buyer. @Brandon Turner's "The Book on Buying Houses with Little to No Money Down" has a chapter on wholesaling that provides great information. I've wholesaled over 100 houses over 14 years and it's a great quick cash generator. We just put 4 properties under contract this week and will likely close them as wholesale deals at the end of this month. I still wholesale because I get so many deals and instead of wasting the leads, I pass some of them to other investors. 
The 2 keys to succeed in wholesaling are: A) Being very good at finding good off-market deals; and B) Having solid cash buyers in your network. For instance, I have a cash buyer who wants to buy 15 properties in 15 days - we already sold them 1 and we're about to finalize 2 contracts today so they can buy 2 more properties from us. If you have a handful of those type of buyers, then you need to focus on finding good deals.

3. Get a Business Line of Credit. If you have great credit (700+), you can get an unsecured business line of credit. You can convert this to cash and since it's unsecured, you can use it for whatever purpose like putting it as downpayment on a hard money loan, or using it to pay for the repairs. BLOC providers claim they can give you up to $250,000. The typical amounts I've seen them provide is $40,000 to $100,000 and the average right now is about $60,000. 

Well, in some markets, $60,000 is enough to get a newbie started. The downside of BLOCs is that there's a success fee of 10-20% once they get you the money. The upside is there's 0% interest for the first 6-13 months so your cost of money is manageable and comparable to hard money rates. 

By the way, do NOT pay any BLOC provider upfront - run in the opposite direction if they try to get money from you. One time, a BLOC provider told me to give them $2,000 and they promised me $200,000 in unsecured BLOC. Good thing I did my research and I found the cheapest BLOC provider in the country which does not charge any upfront fees. Whew!

4. Partner Up With More Experienced RE Investors. If you have NO cash, you can volunteer to work for an experienced real estate investor by finding a good deal for him or her (hence, you do #2 above - Learn Wholesaling). You can then count that as experience.

If you have some cash, you can invest your money with them and again, that counts as experience. Where will you get the cash? If you have great credit, get an unsecured Business Line of Credit (#3 above).

If you have a good enough credit and some cash, you can get the hard money loan and put 50% of the cash needed on the deal. They can bring the experience, do the work and put up the other 50% of the cash and you can then split the profit 50-50. Of course, that's just a suggested set up. The real partner structure will depend on the deal, on the experience of the rehabber you're partnering with, what else are you willing to provide to the partnership, and what you can negotiate.

Of course you need to vet your future partner first - find what other investors say about him or her, inspect their project site and see what's going on, check the quality of the work, and do a background check. If you like what you see - specially if your partner will bring some cash to the table as well, then the remaining step is get a good attorney to draft an agreement that protects the interests of all parties involved.

and lastly

5. Talk to Different Types of Lenders - Get to Know Them and Their Product. I heard the expression - "You should dig a well even before you're thirsty". That's a sage advice for raising capital for your deals. You need to approach different types of lenders NOW even before your first deal so you know the different financing options available out there. For instance, there are:
a) Conventional mortgage lenders
b) Hard money lenders
c) Portfolio lenders
d) Business Line of Credit providers (as mentioned already)
e) Private lenders and
many more. Interview them and find out their underwriting guidelines. Ask them for their various loan programs. Each of these lenders are very different from each other and will be useful for you depending on the properties you're trying to buy. For instance, a conventional lender will turn you down for a loan on a property that needs a lot of repairs but your hard money lender will likely fund the deal if you're buying the house cheap enough.

So there - you now have 5 options so you can get some cash to do a deal and break that "chicken or egg dilemma". 

To the more experienced investors out there - what did you do to raise money your first deal?