Wise to use private money to become a landlord?

Question

My marketing efforts have successfully brought me an investor with 3 properties, each of which are currently tenanted. Would it be wise to seek private money to buy the properties? I have asked for the annual taxes, insurance figures, and year built for each property. Is there anything else I should consider? (I knew this information is basic, whether I purchase them or assign them.)

I have read that having money set aside for each property to maintain it is best and I have followed that rule. Can private money be used for property maintenance and taxes as well as property purchase?

Please advise,

Charlene

I have read that having money set aside for each property to maintain it is best and I have followed that rule.  Can private money be used for property maintenance and taxes as well as property purchase?

Please advise,

Charlene

Scott Trench · Answer

Personally, I choose not to use private money, unless I am putting in as much cash as the other investors. I believe that in my personal situation, I do not have enough experience, time, or knowledge to justify putting other people's money at risk in an investment.

I do, however, believe that with a dedicated focus on real estate investing, and a strong commitment to my own personal finances, that it is possible for most to save up the $10,000 - $20,000 needed to buy most small first investment properties within a year or so of hard work. That's how I would choose to buy my first investment properties.

As a newer investor, I personally would not seek private financing for deals. Were I in your position, with years or decades of investing experience and a proven track record of successful real estate investment, then I would seek private money for some great deals.

Mitch Messer · Answer

Hi @Charlene Garrison! If you are just starting out, I would strongly encourage you to wholesale these deals to a landlord, rather than becoming one right now. Right now you are busy learning marketing, and marketing is the #1 skill to develop as an investor. So, stick to mastering that and the world will be yours!

That said, here are my answers to your questions:

What other data is needed regarding the rentals? In addition to taxes, insurance, and year built, you'll also want to know:

• What are the rents and are they consistent with the surrounding area?
• When do the existing leases expire? How long have these tenants been in place?
• What's the overall condition of each property? Any deferred maintenance? Any major recent repairs?
• Who's currently performing the property management function? How much is it costing?

Can private money be used for property maintenance and taxes as well as property purchase? Absolutely, private money is just funding from regular individuals. You can use it however you need, as long as you're paying the private lender their negotiated rate of return.

The real question here is does private money make sense for this situation. Let's say your net return-on-investment from this deal would be 10%. If you have to pay a private lender 9% to borrow the money to do the deal, you can see that it stops looking like a deal pretty quickly!

If this is truly a great opportunity, sell it to a hungry landlord, make a quick buck, and reinvest that money into your marketing. At least, that's what I would do!

Good luck!

Steve Vaughan · Answer

@Mitch Messer has provided awesome advice!

I would also explore the possibility of this tired landlord carrying the financing. They tend to like cash-flow, but not the work of tenants and toilets anymore.

I wouldn't buy on a land contract, ever, but all of my seller-financed purchases have been from tired landlords.

Plenty of info on seller-financing here on BP.  I am NOT a step by step coach.  Good luck!

Bill Gulley · Answer

Using a true private investor or lender does require you to take a very prudent path, the less they know about financing, the greater the burden on you to safeguard their money. If you take the approach of them being secured and getting their money back along with their profit coming ahead of the life of your first child, you are going into it with the right frame of mind. Otherwise, don't take the money! :)

Brian Gibbons · Answer

@Scott Trench

Private money used prudently and joint venture partnering accelerate success in real estate investing.

Here's an example for private lending that is really low risk for the private lender

Let's say you found a grandma's house, and it needed $10,000 in work

ARV is 200,000

Wholesaling is a terrible offer from the seller, at point 7×200,000 = 140k less than 10,000 in repairs equals $130,000 less 5000 in Wholesaling fee equals 125k

Do you think grandma's going to take the $125,000?

What if you get a joint venture with the seller or a cooperative rehab with the seller?

First figure out the cost to resell the property, say it was 10% to sell with commissions and closing cost and some wiggle room

So costs to sell our $20,000

Now you need $10,000 in rehab

Go to your REIA and ask for people that have money in their IRA that they want to get 10% on their money and get paid in three months instead of 12 months

Use a custodian like trustetc.com for the private lender candidate to set up a self-directed IRA

No you have access to $10,000 for the rehab

Let's say you want to make $10,000 as a joint venture fee

So here are the numbers

Remember it cost 10% to sell or

-$20,000 costs to sell

-$10,000 in rehab

-$10,000 for your joint venture fee

Total is $40,000 from the 200,000

Seller nets at closing on resale $160,000 loan

-----

Steps

Buy the property on a private first mortgage, $160,000, no payments for four months, due and payable upon resale

Create a second mortgage for the private lender

Create a third mortgage for you the joint venture partner

Fix it, list it, sell it  for $200,000

Everybody gets paid at closing, Low risk for the private lender

Wise to use private money to become a landlord?

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