​How to get the money no matter how big your deal is.

How to get the money no matter how big your deal is.

You hear a lot of the guru types saying things like “find the deal and the money will come”. They put it out there as if some magic genie is going to suddenly appear out of a lamp and hand you a pile of cash. In the real world there is a bit more involved in getting the money.

Before we move forward with this discussion I need to make a point. As odd as this will sound, it is actually more difficult to get funding for a small amount that it is to get funding for a big deal. The only real catch is that the bigger deal the more detail you will need to provide to secure the loan. So there is a sliding scale here. The smaller amounts will be harder to find a lender, but require less documentation. The larger deals will be easier to find a lender, but they will ask you for much more info.

Imagine that you have a chance to wholesale a house in a junker neighborhood. The price of the house is super cheap. You can buy this house for $10,000 cash. You also happen to know that you have a friend who will buy that house for $20,000. The problem is that you don’t have any money. You are new, and just trying to build up your finances. So what do you do?

If you are an educated investor, you do this deal by flipping the contract. The educated investor will do this deal with no money, but I needed an example where you actually need cash and this is a super simple example.

It is easy to see how you will make a very fast net profit of $10,000 on this deal. A monkey could understand what is going on here. Now the problems start. Because of the amount, you can pretty much forget a traditional mortgage. Even if you find a rural bank that fund at that level, there is no way this piece of garbage house will pass any sort of inspection. Without a good inspection no bank will fund this deal, so banks are out.

Hard money lenders are not going to be much use to you either. Most hard money lenders won’t go below $100,000. A few hard money lenders will go below $50,000 but not many. At your price point you have already eliminated all of the national hard money lenders, and the majority of the little local hard money guys. You can go lower than $50,000 with some of the smaller local guys. You will need to go to your local REIA club and foster a relationship with local hard money to even have a chance at getting one of them to fund this deal. The reason that hard money won’t touch these micro deals is that any professional hard money lender is lending out money that they have borrowed from someone else. These guys get paid the spread between their cost of borrowed money and the price that they can lend it out. So when they have money sitting on the sideline they are actually losing money in most cases. Some of the local guys are using their own money, but they don’t want to fund the micro loan either because those little loans can tie up their capital and keep them from placing their money into the bigger deals that they crave.

Now you are down to two possible methods of funding a simple profitable deal. You can either take on a partner who has the money and split the profit with them. It is pretty easy to get this sort of loan if you have or are connected to a network or real estate investors. You just need to show your partner the money. Now hear me on this, giving up 50% of your deal is really expensive money.

The last option to fund this deal is to find private money. Private money is a strange world. The more you work to find private money, the more you have at your disposal. The earlier you start this process the better. You raise private money by running your mouth to everyone who will listen. You need to tell friends, family, and random strangers who sit next to you in public that you make money in real estate and sometimes you do deals with partners. That is private money at its core. There is a lot more to the mechanics of private money but that is beyond the scope of this post.

On the flip side the bigger commercial deals will have lenders lining up to fund your deals. I say this with two caveats. The first is that your numbers make sense. Professional money lenders are not fools. They will look over every number that you provide and they will make your prove your numbers. To be clear, when I speak about larger commercial deal, I am talking about deal larger than $5,000,000. Actually 5 million is the low end of the spectrum when we talk about larger commercial deals. I have legitimate people who call me out of the blue offering to fund these sorts of deals.

For example, imagine that you are buying a 140 unit multi-family property. The property is up and performing and you think the numbers look good. So you make your offer and you get accepted. You are now under contract for $7,000,000. At your purchase price this deal has a current cap rate of 10%. This is a pretty good deal. The property has no differed maintenance. The owner is selling because he wants to retire, there is nothing wrong with this deal.

Commercial funders are much easier to deal with than banks. These people are actively looking to place hundreds of millions of dollars. They will ask you for rent rolls, bank statements to verify the claimed rental income, they will ask for your personal financial statements, and much more. The good news is that the underwriting process is a safety catch for you. If you have made a mistake in your numbers or if you forgot to take something into account, they will catch that mistake for you. Their job is to make sure that they can place loads of money into safe and profitable deals. If you deal makes financial sense, then they will do all the work to get you funding. Sometimes there will be an intersection between your deal and 100% funding. Other times you will need to put up equity to get a deal funded. This is where the really sexy stuff happens. If you need 20% skin in the game to make this happen, and you don’t happen to have the 20% or even enough money to buy a cheese sandwich. The professional commercial funders will look to find your other vehicles like bridge funding, and equity partners to bridge the gap. How easy is that? You bring your large deal to one place and they perform a due diligence check for you and then go and do everything they can to put the money together for you. If they fail, they don’t get paid, so the really do care about helping you.

I hope that helps

Josh