Using your own money or someone elses?

Question

Hello BP Tide (Podcast #240),I am new to investing and just got into my first buy and hold deal on an mfh, in Puerto Rico at $65k. I am using a conventional nonconforming loan at 5.625%, with 25% down (which I'm able to come up with). I am looking to continue to grow my RE portfolio, however with a limited amount of capital, at some point I won't be able to come up with the 25% down. So, here's the question:1) Is it a good idea to use my own capital to fund RE deals?2) How would it be possible to start a buy and hold deal without putting any of my own capital into the game?Thanks in advance for any insight!Francisco

Francisco Hernandez · Answer

Thanks to everyone who replied.@Joe Villeneuve I will keep in mind Golden Rule #1. Thanks for the input@Mike Hurney Thanks for the tip. The property is in San Juan and the average rents in the area are around $4-500/door (my wife was tipped off on the property from a fellow investor).@Cody L. Good point. I am borrowing someone else's money which is already a benefit. As for selling to the LLC, I was hoping to have the bank cut me a check for the property and have the LLC now own the property. :). Wishful thinking!@Cortney Jones thank you! My wife and I are very excited. This is our first property and we look forward to many more. As far as what I want, I plan to use the knowledge that I've learned (and have been inspired by) from others on BP and the capital that I've gained from selling my house, to help start my own consulting company through REI. (I'm not sure about you, but I'm tired of having a boss and can't wait to be my own boss, haha).

Cortney Jones · Answer

@Francisco Hernandez - First off, congratulations on your first deal! SO MANY people learn and learn and wait for the right time and never take action. You DID IT! Secondly, it's your life, your business and your wealth, so you get to make the rules that you want to follow. Using other people's money (OPM) provides you a greater leverage, therefore, higher returns. That is one of the beauties of real estate. However, with leverage comes obligation to others, whether that be private individuals who invest with you or a bank. You need to think through and clearly decide what your investing plan is. What do you want to accomplish? (leave a j-o-b; own 5 free & clear doors by retirement, etc.) What goals are you trying to achieve? (increase wealth, cash flow, etc.) Once you know that then you can look at various business models and which ones are right for you and your goals. As an example, being a landlord can be fairly hands off if you hire a GOOD property manager, it can generate small cash flow usually and increases wealth. You can gain appreciation and cash upon sale, etc. However, if you do it with SFH then it usually isn't a great cash flow vehicle. So trying to make a living from it can be difficult. On the other hand, wholesaling and/or rehabbing is pretty much a j-o-b. Yes, you work for yourself and yes, you can eventually hire others to do a lot of the work, but you have to put in the work to create the systems and processes to make that happen, then you have to manage it. There are plenty of ways to buy real estate with no to little money down. They are not traditional such as going to the bank. You can take over properties subject-to the existing financing or use owner financing. You can also get money partners and private lenders to work with you on deals. You can use a master lease option to control a property and then release it or sell it to make cash flow or cash, depending on your exit. Figure out what you want from the business. Then, analyze the different business models and decide which one fits you and your goals. Then, learn everything you can while continuing to take action. The best learning comes from doing. Best of luck to you and congrats again!

Cortney Jones · Answer

@Francisco Hernandez, I understand. I've been my own boss so long now that I say I work for a crazy person. :-) Of course, I speak of myself.

Cody L. · Answer

Francisco: getting an LLC has nothing to do with being able to borrow more/less money. You are already using "other people's money". 75% of the cash is coming from the bank. There are ways to minimize the amount of your contribution but each extra amount of leverage usually costs more in terms of rate or equity as each extra amount comes with additional risk from those supplying it

Mike Hurney · Answer

@Francisco Hernandez Hola.Where's the property and what are the projected rents and expenses? If you do not have this property under Agreement please don't divulge the actual location.

Joe Villeneuve · Answer

You need to establish your exit strategy as part of your entrance strategy. Yes, there are a number of ways to reclaim your cash at this point, but it would be hard for me to tell you what your specific options would be on this deal, without know more detail about this deal...and the market you bought this property in.Golden Rule #2? Never, under any circumstances, rationale, reason, etc...forget Rule #1.

Francisco Hernandez · Answer

@Joe Villeneuve thanks for the advice. Now that I have spent the money, are the ways to reclaim it. i.e.: sell to an llc that I create, if I can get a loan for that llc?Also, what's your #2 golden rule?

Joe Villeneuve · Answer

For me, this falls under on of my 2 Golden Rules to REI:Golden Rule #1: Never under any circumstances, and rationale, any reason, any excuse, any urge, any time...spend your own cash/money. Use it an unlimited number of times,...but NEVER spend it.