The last blog article I wrote was about why real estate investors should “Fire The Bank” and learn to use other people’s money (OPM) to buy houses in 2012. I outlined three specific reasons why investors should no longer rely on bank financing.
Most investors I interact with want to eliminate the need for bank financing, but the question I am most often asked is Jim, “show me the money.” (This line became very popular after the Jerry McGuire movie.)
Well, the truth is that I do not have a money tree growing in the back yard, so I cannot literally show you the money. I will, however, show you some strategies to help you find your own money and, better yet, start to attract your own money in the form of private lenders for your real estate deals.
1. Create your own bank with retirement accounts
The best-kept secret in America is the Self-Directed IRA. There are billions of dollars sitting in retirement accounts like 401k and various IRAs, but only two percent of the total assets are in self-directed IRA accounts. Most of the retirement account assets are sitting in stocks, bonds, mutual funds and CDs. The main reason for this is because the banks and brokerage firms sell these investment instruments.
A self-directed IRA allows the owner of the account to make investments in many different asset classes, including real estate. It is easy to establish a new self-directed IRA or roll other existing retirement funds into a self-directed IRA. The account custodian will take the role of administrator and assist with the documentation in your real estate deals and help you understand the prohibited transactions to avoid.
Once funds are in a self-directed IRA they can be used to purchase real estate or to lend to another investor to purchase real estate. If you buy real estate within your self-directed IRA, all of the future proceeds and profits will need to go back to your retirement account and not into your checkbook for everyday use.
The other caution with buying real estate within your own IRA is to be sure you practice good asset protection practices, as you will not want your IRA to ever be involved with a lawsuit.
I prefer to use retirement accounts as the bank. Accounts owners can lend the funds to other real estate investors. The retirement accounts get a fantastic return and the investor gets the freedom to buy houses without needing a bank mortgage. Who do you know that has a 401k or IRA that you can talk to about working with you as a private lender for your real estate deals?
2. Network, Network, Network
Everyone has money problems today, and that includes everyone from the unemployed to the very wealthy. The wealthy are struggling to find a path to cut losses in the stock market without placing all their funds into CDs that are earning less than 1% in today’s marketplace.
Millions of dollars have been taken out of the market and placed on the sidelines. Today’s economic challenges make it easier to approach potential lenders with a real estate option as an alternate to CDs and the stock market. Who wouldn’t want to earn more than 1% ?
Develop a simple, concise 30 to 60 second summary of what you do and how you work with private lenders to provide a solid return. End your short presentation with a question that requires a response. Once you can naturally tell your story, you are set to spread your message.
Where can you effectively network to find private lenders? Start with financial type meet-ups, REIA meetings, and other meetings with small business owners. You can also spread your message using social media such as Facebook, LinkedIn, and Twitter.
The most recent private lender I picked up was because I was a good listener. I heard this individual tell me that he use to live off of his CD interest, but that it is no longer possible since the rates are now so low. He also told me that he was not sure what to do with their funds because he did not know how to get a good return on a safe investment.
I had my 30-second speech ready, solved his problem, and I am actively using those funds for my own deals now while providing him with a safe investment and excellent return.
3. Attract the money
I am an Engineer by education, not a salesman by any real stretch, so I am not personally comfortable with asking people for their investment dollars for my real estate deals. The good news is that once you start to have some success working with private lenders, you will find that more of them will begin to find you as “success breeds success.”
If you begin to attract money, are you ready to put it to good use?
The deals and opportunities in today’s market are likely the best of our entire generation. The key is to be able to buy as many houses as you want without using your own money and without needing a bank mortgage.
In my next blog article. I will discuss joint venture options for investors looking to buy and hold long-term rental properties with out needing a bank mortgage.