Do you do 100% Funding?

Ahhh, the question as old as time itself, "Do you do 100% funding". It’s like the funding holy grail, everyone wants it, but no one knows where to find it. Like most lenders, I get this question all the time and it’s usually from people who’ve just gotten into the business. The story usually goes that they have a great deal, but no money to put into it. 100% funding is certainly not impossible, but if you're new to the business, it's not going to be easy to come by.  I've listed my thoughts below.  Feel free to message me with any questions or your own solutions for raising 100% funding.

Why Lenders don’t Like 100%

The primary reason is that we want you to be invested in the deal. It doesn’t take much for a deal to get ugly, so we want to make sure that you have plenty of incentive to hang around and get the job done.

When is 100% funding realistic?

For most lenders, 100% funding is almost never on the table for beginners. It’s simply too risky to offer this to someone who is an unproven quantity. I have found this to be so universally true that I would go a step further and say that if you are a beginner and you are offered 100% funding by a lender, you’d better do your homework and make sure that they are legitimate. This is not to say that no one gets 100% funding. There are plenty of experienced investors who have built relationships with lenders over time and are now funded at 100% on just about everything that they do.

Other ways to decrease your Skin in the Game.

Joint Ventures

Some lenders will do joint venture funding at 100%. What makes this tricky however is that it has to be a good enough deal that the lender is willing to incur the additional risk of you having no money in the deal. Most lenders that I know will not consider JV’s unless they have already round tripped a deal with someone through their normal process. When you do a JV, you should be prepared to give up a large percentage of your profits (50-60%). JV’s also often come with preferred returns for the lender. This means that when the property is sold, the first share of the profits go to the lender. If the lender gets a pref of 15% on their money, it means that the lender gets paid a 15% return on their investment before any other money is paid out. JV’s can be a very useful, but before doing one, be sure that you understand how you will be paid.

Collateral

If you have other investment properties that you own free and clear (without a mortgage), some lenders will allow you to cross collateralize and then require less or no deposit. Not all lenders do this, but if you have investment properties, it’s definitely worth asking.

Gap Funding

If you feel that you can convince others to believe in your vision, raising money from friends and family or perhaps other investors could be a great way to go. What this means is that investors would provide the money to cover the deposit (or gap) in exchange for some share of the profits, and then you would use a hard money lender to fund the rest of the project. One important thing to keep in mind however is that many hard money lenders will want to have the first and only lien on the property. Therefore, if you plan to raise hard money, don’t allow your investors to put liens on the property.

My Recommendations

Before trying to raise hard money, be sure to do your homework. If you call a lender and push hard for 100% funding, it will signal to the lender that you don’t know the business and will make you seem like a riskier investment. The first thing that I would suggest is to start off wholesaling. Wholesaling is a great way to make money while you learn the business, and it will enable you to generate your own deals. Wholesaling is also a great way to make connections and to develop relationships with people more experienced than you. This way, when you decide to do your first flip, you’ll have plenty of free advice from all of the people that you’ve sold to and met along the way. Wholesaling will also make it more likely that you find the right deal for you. Major rehab deals are generally not the best for people just getting into the business, as there are so many things that can go wrong and cost you money. Investors who don’t wholesale often seem to choose deals that are too difficult for their first flip. The best deals in real estate go to the best and busiest investors. The only way around this is to generate the deals yourself.

If you are determined to do the rehab yourself, generating a pool of investors to provide gap funding (money to cover the deposit) can be a smart way to go. As you grow your business, these investors will prevent you from having to turn away good deals due to financial constraints. You will want to have as large a pool of investors as possible so that if an investor drops out, you won’t lose time having to find a replacement investor.  Before you take on investors however remember that when you are new to the business, you are less likely to be given great deals, you're more likely to make mistakes, and you're therefore more likely to lose your investors' money.  Starting with a small and manageable deal is one of the best ways to mitigate this risk.