When I started investing in real estate in 1982, I thought you had to have money. I was working a job and was broke. Since then, I have learned that you don’t need money, credit, or a steady job to do this type of investing. Of course, having a little cash wouldn’t hurt, but I know some readers don’t have any, so this article is for you.
Mortgage brokers and short term money
The best place to get short-term money is through mortgage brokers, who know what will work and what won’t. They know what they can get on the market today. Some will have access to private funds that require no qualifying by the borrower. Equity in the house is the only concern.
Brokers can be a valuable asset. Remember, when I started I had no credit. I had no choice but to use whatever funds where available, so I found a broker who would loan 50% of the appraised price regardless of my financial condition. The cost was high, but the rewards made it worth it.
He charged me 10% of every loan I made, and I paid 18% interest. I know this sounds high, but I soon learned it wasn’t the cost of funds that count, but the availability of them. Because I had access to these funds, I simply bought up junkers with them and made thousands of dollars in profit on each house.
Let me ask you a question. Would you rather pay a mortgage broker 10% of your loan or pay a partner 50% of your deal? Tough choice, isn’t it?
Mortgage brokers work on a commission. They do not get paid unless you get paid. If you use private money, get used to the idea of paying high points and consider it a cost of doing business. We can get a high interest loan and still make money. Remember, it’s not the cost of the money that matters. It’s the availability that counts.
When I first started, I borrowed on 76 loans at 18% interest, 50% loan-to-value ratio (LTV), 6 months interest prepayment penalty, 7-year balloon payment and 10 points up front to the broker. And I still made money on every single one of them!
How it works
If the house needs repairs, you may not get all the money at once. Some of it may be escrowed for repairs. For example, suppose you get an offer accepted for $15,000 cash on a property whose value after repairs is $45,000, and the “as is” value is $35,000, and the estimated repair costs are $4,000.
We know we can get a loan from a private investor for 50% the fixed up value of the property.
|
Value After Fix Up |
$45,000 |
|
As Is Value |
$35,000 |
|
Repair Estimate |
$ 4,000 |
|
Maximum Loan Amount |
$22,500 |
|
Cost of the Loan |
$ 3,000 |
|
Net From Loan |
$19,500 |
The problem is that the loan is based on the after repaired value. The broker will write the loan for $22,500. You’ll pay the cost on $22,500, and you’ll start paying interest on $22,500 as of that day. But the broker will escrow 50% of the difference between the “as is” value ($35,000) and the “repaired” value ($45,000).
The escrow amount would be 50% of the $10,000 difference because it is a 50% LTV loan. So $5,000 will be held in escrow until the work is completed. After the work is done, the mortgage broker will send an appraiser out to look at the finished house and, if all the work is completed, he will give you the $5,000 held in escrow.
In the above example, we needed $15,000 cash to buy the house and $4,000 to repair it, for a total of $19,000. But we are only going to get $14,500 from the loan at closing, so we would construct our offer this way:
Q: “Mr. Seller, I’m going to give you $15,000 for this house. I’ll give you $10,000 at closing and $5,000 within 60 days. Will that be alright?”
A: “Yes. That would be OK.”
To make this work, the seller will hold a second mortgage for 60 days because we obtained the first mortgage from a private investor through the mortgage broker. This is known as “subordination” and is a useful tool for any investor.
This way, we are fully protected. We would get $14,500 from the loan proceeds, give the seller $10,000 of it, and still have $4,500 left over for repairs. Since we only need $4,000 for the repairs, we get to keep the extra $500.
Generally, the money mortgage brokers find comes through private individuals. A private investor is very different from a bank. There is none of the usual verification ordeal. The only verification is the value of the property.
You do not need good credit, these loans are not reported on your credit report, and there is usually no qualifying. They don’t care about your personality or personal history. Their only consideration for the loan is the loan-to-value ratio.
The length of the loan may vary but, generally, they will amortize the loan for 15 years and call it due in a balloon payment in 5 years or less. Private short term money like this is very valuable to us as investors. This is the kind of money that can make you rich!