Executive on how to finance a real estate investment journey other than through conventional means
This article was provided by RCN Capital
It’s no secret that fix and flip investing has become a staple in the real estate investment space. The concept of purchasing a property, increasing its value, then selling that property for a profit has grown in popularity exponentially over the last decade. Not only can these types of investments provide investors with solid profit margins on each deal, but it is a proven strategy that can lead investors down the path of entrepreneurship that every investor dreams of. However, in today’s economic climate, capital is hard to come by, and investors may be wary and more conservative to invest during a time of lower inventory and rising rates. What if I were to tell you that there are other ways to go about financing your real estate investment journey other than conventional means?
Private Lenders
The role that private lenders are meant to serve towards investors inquiring about fix and flips is to provide them with favorable financing options that require minimal documents and quicker closing times, and overall providing an easier originations process. Now, private lenders will tend to require experience from the borrower when considering lending on a fix and flip loan in order to give the best terms available. RCN Capital, for example, requires a minimum 15% down payment on fix and flip scenarios for experienced investors, and will fund 100% of the renovations.
The funding of the entire rehab is very attractive to investors, and putting 15% down is a reasonable commitment in order to get a deal funded. If you have experience, you can get these deals done in months, and once that property sells, you’re well on your way to using those funds from the sale to finance that next project. Private lenders don’t work off federal regulations, meaning they can work with more flexibility. With that flexibility, they are granted the freedom to make their own terms and adjust the fees on these loans. Many private lenders also lend nationally, so you are opening yourself up to more opportunities and new markets.
The ability to get fast funding is attractive to investors of course, but it is important to caution that when working with private lenders, many will underwrite the borrower, including running a credit and background check, as well as verifying cash reserves in order to justify getting the loan funded. Though there are many advantages to private lending, there are definitely some handicaps to consider regarding capital if you are an investor. Private lenders usually require cash at closing, so if your plan is to use a retirement account in order to fund your deal, it is possible that would either be a disqualifier or there would be a reduction in leverage. Whether you’d be funding the closing costs yourself, or with partners, keep in mind that having liquidity at closing as well as to cover debt service will be a requirement to get your loan approved.
Partner with House Flipping Investors
One of the more popular and proven ways to working as an investor with little to no capital is to go into business with a partner. Some of the benefits of this method that can be enticing to investors is the fact that you are able to put less money down since you’d be partnering with one or more investors, as well as adding their experience to your resume. This could help you get better terms and potentially increased leverage.
Keep in mind that when you partner, you will be splitting the return on investment, but it is important to consider the situation and the benefits of working with partners. With inflation running rampant right now, you can still build your resume by flipping properties while putting less money down, and in turn building relationships that can lead to more opportunities for you down the line. Whether it's getting invited to real estate events, tradeshows or even joining something as simple as a Facebook group, you will open yourself up to more networking opportunities as well as familiarize yourself with other markets that you may have never considered entering previously.
Seller Financing
If going through a traditional or private lender isn’t an option, seller financing is a great option that allows the investor to work directly with the seller of the property to get funding. With this approach, there is more flexibility regarding negotiations for approval. Traditional or private lenders are more than likely going to require a higher down payment as well as a minimum credit score in order to qualify. With seller financing, these questions may still come up, but you will have the leeway to discuss a lower down payment and if credit is lower, you will have an opportunity to explain the circumstance. Another area where this method can be advantageous is if it is a rural property. There are a lot of great properties out there on the market that lenders may not touch because that property is in a rural area. Seller financing can be a great outlet for investors looking at these types of properties.
In a podcast titled Uncontested Investing, host Tim Herriage brought in seller financing investment expert, Eddie Speed, and Speed offers insight about how he got into seller financing back in 1980, which became a popular investment method then due to high inflation and high rates, very similar to the environment we are in right now. Speed spends the podcast offering true professional advice from an experienced investor that is ultimately meant to guide investors to prosperity.
Investors can actively search for properties that are advertising seller financing or pitch the idea directly to the seller. One great point to bring up to the seller is the potential to defer taxable earnings of the sale over multiple years. At the end of the day, it is best to remember that you are selling yourself as an investor as well. It is important to be transparent and honest about your intentions and goals for the property. Following these steps can make seller financing a serviceable option for you as an investor.
Self-Directed IRAs
Another option to consider is using a self-directed IRA to fund your fix and flip investment. A self-directed IRA is a type of retirement account that can hold various alternate types of investments that would usually be restricted by traditional retirement accounts, real estate investments being one of them. One thing to consider when using this form of capital is that you are essentially using your retirement funds from the account in order to finance the down payment and closing costs of the property, therefore the profits made on the deal would be considered an investment for your retirement, and you can continue to reinvest those profits to grow your portfolio.
When using a self-directed IRA, investors will usually go through a private lender to secure the property, since they require a lower down payment and faster funding rather than going through a traditional lender. If that is the case, then it is important to consider that there may be caveats regarding the deal. For example, at RCN Capital, we can use self-directed IRAs as capital to fund loans, but there would most likely be a leverage reduction for the loan. This is mainly because using funds from a self-directed IRA would result in limited recourse, and many private lenders require there to be some sort of recourse to be able to lend.
Keep in mind, self-directed IRAs are typically only available through specialized firms that offer the service, so the best thing you can do when considering this option is to do your research. If you have a self-directed IRA, I advise checking your options and, if you want to use these funds with a private lender, inquiring about how they would work with you using a self-directed IRA as a form of capital. An important thing to remember is that these types of accounts are truly “self-directed” so whichever firm provides this account to you is not able to give any financial advice. Real estate investing is very attractive to many people with self-directed IRAs, and they can keep investing their funds over and over and making profitable gains for their eventual retirement.
Do your Research
When it comes to real estate investments, it is a common misconception that there are limited options when looking for funding, and that you need a large amount of liquidity on hand. As discussed, that is not the case and in a volatile market, these are all options to consider when you have little to no capital and want to break into the real estate investment space. There are still plentiful amounts of opportunities in the industry. The real estate market is one that ebbs and flows, and getting experience now while building up capital will absolutely set you up for success when the market corrects itself and things even out. Consider these alternative options, do as much research as possible, and continue to grow your network in the industry to open up more opportunities. The path is there to set yourself up for success.
Mitchell Zagrodnik, Jr., business development coordinator, joined RCN Capital in the spring of 2022. Mitchell brings a strong work ethic, communication skills, teamwork, and ambition to RCN’s Business Development team. Mitchell’s goals are to build new customer relationships as well as maintain existing ones, and to educate potential clients on RCN’s products. Mitchell’s previous work in sales and customer service will contribute to RCN’s longstanding commitment to customer relations. Mitchell graduated from the University of Connecticut in 2018 with a degree in Political Science.
