I have no money and bad credit but I want to invest - how?

[Michael Ealy]

A few weeks ago, a lot of people asked this question 

"I have no money and bad credit but I want to invest - how?"
when I asked BPers to name the ONE question they have about apartment investing. Here's the post:

https://www.biggerpockets.com/forums/432/topics/771354-what-is-your-one-question-about-apartment-investing

And you can do it the "Long Way" or you can take a "Short Cut" or you can do a combination of the two.

1. The Long Way

You can do it the same way I did. When I lost everything back in 2002-2003, I had $0 in the bank and my credit score was super low since all my properties got foreclosed on.

So I had to get creative, I hustled and worked hard. HINT: I used other people's credit and other people's money. Here's how I did it:

https://www.biggerpockets.com/forums/55/topics/692382-from-bankruptcy-to-1-000-units-part-2-rising-from-the-ruins

2. The Short Cut

The short cut is in no way any easier than the Long Way. In fact, it's actually harder. But knowing what I know now, if I lost everything, below is how I would rebuild my apartment portfolio (back to 1,000 apartment units) in 1-3 years:

A. Focus on getting great deals - probably smaller ones like 10-30 units

The reason why you want to start smaller is so that you can use a private lender to fund the whole deal.

B. Finance the great deals using a private lender. When you have a relationship with a private lender, and the deal is great (not just good), the lender should have no problem funding 100% of your acquisition and rehab costs. This is exactly how I got this deal funded (and made over $1M after 6 years of ownership...I paid my lender 11% interest on his money):

https://www.biggerpockets.com/forums/311/topics/644570-how-i-made-over-1-million-on-1-deal-after-6-years-of-headaches

C. Another thing you can learn is buying properties owner financing by taking over problem buildings or buildings that are not necessarily problematic or losing money but the owner is tired/motivated because of some other financial obligations. 

So you can do a land contract $0 down, improve the building and then sell or you profit from the cashflow. The owner on the other hand, is relieved of the ownership hassles and becomes the "bank".

Here's the bottomline: anything you lack, someone else has it. 

You lack money? You can borrow it. You can find an equity partner. You can even get the seller to finance it. 

You lack credit? Same thing: you can use other people's credit or you can do a deal where your credit becomes irrelevant.

You are limited only by your will and creativity.

So go HUSTLE and do a deal!

[Michael Ealy]

Originally posted by @Erik W.:

@Michael Ealy, thanks for following up on that topic.

Regarding land contracts: I have always been of the view they are terrible from the Buyer's perspective, but you recommended that strategy above.  I am concerned with leaving title with the Seller, which is typically how land contracts (i.e. Contract for Deed) work in my state.  Let's say the Buyer holds up his/her end of the bargain, investing time and effort to turn the property around, then the Seller refuses to or cannot deliver clear title.  There could be many reasons. Seller could be found liable in a lawsuit and have a lien attached to his property that he cannot clear; Seller could get divorced and spouse gets a 1/2 ownership stake; Seller could see the property performing better and want to weasel out of the deal.  In any one of these scenarios, you'd have a potentially very expensive legal fight on your hands with no guarantee of success or even getting compensated for your efforts.

I'm interest to learn what strategies do you use to mitigate these risks.

 Erik,

I agree - there's always that risk but...here are the Mitigation & Contingency Plans:

Mitigation (or how do you reduce the risk the seller can't or won't give you marketable title):

- do a title search/lien search to be sure there are no liens on the property
- one can have a quit claim deed in escrow (from seller to buyer) and it shall be released in escrow upon certain agreed terms upfront (like payment of 50% of the Note) so seller can't decide later on NOT to give you marketable title
- one can also record a Memorandum of Land Contract/ or a wrap around Mortgage so there's a lien on the property (although there's a risk that the underlying loan's lender can call the loan due)

Contingency (or if the risk happens anyway, now what do you do?)

- in the state of Ohio, the seller will have to foreclose to get the property back/or get clear title if there's a Land Contract on it
- I can cloud the title since I have equitable interest in the property specially if I recorded the Land contract or a Mortgage on the property

In practice, a lot of the sellers selling on land contract can't sell via the traditional route because the buyer can't get financing on the property (because the property is non performing or not making any money). The seller is actually anxious and hoping you turn around the property and get a loan to cash him out or for you to sell the property.

The risk is low and there are things you can do to mitigate the risk.