The Chicken or The Egg?

Question

What Comes First?  The Deal or The Money?

Hey, Team BP.

I’m Leonard.  New to BP.  New to investing.  Not one (1) deal closed to date.

During a recent webinar for us “Newbies”,  a member asked Brandon Turner from a Newbie’s position, “What do I need first?  The deal or the money to get started?”

Some think they need the money first so they’re ready for a deal when it presents.  But…how long can you go between having the financing sit idle and finding that deal and vice versa…? I’m sure the approved loan package with amounts and terms has a shelf life like most things. That’s where I am personally right now; and why I turned to the BP forums for educational/informational purposes. Your thoughts…?

Standing by,

Leonard

By the way,

My initial goal:  Stop paying rent! The spouse and I are renting since we moved to Georgetown, TX from ATL. I want to start by buying/house hacking/holding a 2-4 unit property with garage in A/B neighborhood for starters then build portfolio from there.

Bill Crider · Answer

Leonard;

You don't necessarily have to find all the money. You should probably have 10% to 20% of the money on hand, because you will need some cash for closing expenses. But there are many ways to buy houses without a ton of cash.

FIrst choice of funding for me is the current owner. I have bought many houses with owner financing of one variety or another. Whether it is a wrap, assumption, straight owner finance or other creative method, owner financing does not require that you have a lot of cash. Not every house can be bought with owner financing, so it may limit your choices. But it may also open up choices you would not otherwise have because you did not have cash to buy your dream house yet.

Another choice of funding is: spend less on a house than you planned! The less you spend, the less you finance! Instead of buying the maximum house you can afford, buy the minimum house you can stand. Fix it up, sell at a profit, and use the profit to trade up.

Of course you can also go the route of prequalifying for a loan. Many people do. You can also get to know private lenders in your area. If you are buying as an investment, you can find a private lender who will lend to you or who will partner with you for your first property. Private lenders will not typically finance your homestead, but maybe you need to work up to that milestone.

Until you find the property, you don't know how much money you need. You also won't be as motivated to actually find the cash. So from my point of view: find the property, then the money.

Bill Crider

Account Closed · Answer

@Leonard B.

The deal.  Obviously you need money to make money.  However if you jump in a deal, our human instincts will only tell us how far we would go to get it.  Even if you don’t have money, then you will realize you want to act fast to get a fast loan, find investors, ask family members.  The right people will help out, and those people you will want to be a man of your word and fulfill the return.   Only time will tell after being organized and budgeting, that you handling someone else’s cash or your cash, and then you will tell it where to go, until you get off in a rhythm, and don’t need loans  from anyone and you will use your own money.

Leonard B. · Answer

Hey, Carlos.

You present the moral and ethical sides of the process, which I think about often.  Of course people can litigate to recoup their interests, but once you cross people your reputation will be damaged and no one will want to do business with you.  Well said.

- Leonard

Leonard B. · Answer

@Collin Corrington,

It appears your comments may apply to what I'm initially trying to accomplish, which is house hacking my first investment property - a 2-4 unit property with garage in A/B/C+ market. I can possibly partner with a private lender and equity share ownership with them. Thanks for the comment!

Collin Corrington · Answer

Depends on how good of a deal?  If you find a great deal and are willing to do an equity share money can come flying in.  BUT, make sure you're numbers are solid and so is your business plan on that deal.

Michael King · Answer

Both are nice to have first, but really if you don't have the money, you at least need to know how much you can get before deal hunting.

Leonard B. · Answer

@JD Martin @Bill Crider,

Thank you for the quick replies. I see your respective points.  I would definitely take these approaches when I move into multifamily/commercial investments. I see that I must have some “skin in the game.”  I definitely want to partner and use OPM. So, I will need to build up my credibility with investors, lenders, and HMLs. You’re right.  I can see people saying, “Who the heck is this unknown/unproven guy…?”  This is where I need to know how to analyze, identify, package, and bring value added deals to the table.  Thank you both for the education!

-Leonard

JD Martin · Answer

Money comes first, all the time, in my opinion. I've heard the "find a deal and the money will come" before but I don't buy it, because when that is the situation *you* are the product - i.e. the HML, the investor, etc. is buying you when it comes to whether or not it's a deal. If you are no one - and if you've done nothing, at least in RE you're no one - you will have a hard time selling that product.

To me, if you are not using your own money, then "finding the money" means finding someone that is willing to buy *you* at this point in your journey. Why should they buy you? Do you have extensive experience analyzing deals? Do you have contacts in the industry? Are you working with a partner? ETC.

Think about it in a simple way. Let's say you want to buy a house to live in. You don't (well, most sane people don't) go out and look at all kinds of houses, priced everywhere - or even in what you think you can afford, it doesn't matter - find a house, sign a contract, and then go find a bank willing to give you a loan. Most sellers won't even sign the contract with you unless you were putting down substantial earnest money without a pre-approval letter, which means that the money (the bank) has bought YOU and is willing to vouch for you. Conversely, if you have a pre-approval letter, then you start looking for houses, most sellers are going to accept that pre-approval letter and a nominal deposit because "someone" in RE - the bank - has already agreed to buy YOU.

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