How to Find Funding for Your First Investment Property | Real Estate Investing 2023

what's up guys and welcome to the most authentic transparent and real real estate investing channel on youtube at least that's my goal if you're new here my name is lily and this channel is where i've been documenting my real estate investing journey and bringing you guys along with me from all the steps from house hacking to wholesaling to now buying and renovating my own houses this video is actually episode two in a series that i'm doing and bring you guys along with me as i renovate six units this summer yes you heard that right six combination of some duplexes and single family homes and we are going big right out the gate the question you're probably asking and the reason you clicked on this video is because you're wondering how the heck is she funding six renovations at once and of course how could you get funding for your own deals well you're in the right place because i'm going to completely break down four different methods that you could use to fund your property renovations we'll break down all the numbers talk about the pros and cons and all the things that you need to know so you can get into the house flipping game so i encourage you to grab a piece of paper and a pencil put your phone or your laptop on do not disturb and stay till the end because this video is going to be jam-packed with knowledge and if you stick with me and do the math with me you'll see that you can actually start flipping houses a lot sooner and with a lot less money than you might think and if you're wondering where you can find distressed properties in the first place so that you can renovate them me and the sponsor of this video have you covered because if you don't have private stream yet you gotta get on that as an investor your focus is finding distressed properties and getting as much information on them as possible and that's where prop stream really shines propstream's an online tool in database and i genuinely use it every single day in my real estate investing business which is why i have no problem recommending it to you guys i've used it when driving for dollars like you saw in episode one of my wholesaling journey i use it to pull a list of distressed properties like you saw in this video and i even use it to find and build relationships with people who might end up funding my deals like you saw in this video so if you haven't yet you've got to use the link in my description to get a free 7-day trial so you can start playing around in prop stream and really see how it could take your real estate investing business to the next level so with that said and a big thank you to prop stream let's get started [Music] so as we go through the four methods that you can use to fund your deals we're going to use this imaginary property right here to run our numbers on so that the numbers of the deals stay the same from strategy to strategy so you can see how the strategies themselves differ we're also not going to talk about things like holding costs or capital gains taxes because again those things will be the same from strategy to strategy but we want to know just how do the numbers that are different from strategy to strategy work so we'll get into in a moment but just keep that in mind don't blow me up in the comments section talking about you forgot to talk about closing costs and realtor fees and all that stuff we know all right so we're saying we could buy this distressed property for a hundred thousand dollars and if you think a hundred thousand dollars is high for your market or low for your market just stick with me a hundred thousand dollars is a good number to do math with that's why we're using it so hundred thousand dollar purchase and let's say that it would take a sixty thousand dollar rehab to get this thing into the type of condition you want and you've got an arv of two hundred thousand dollars that arv stands for your after repair value which means what will this property be worth after you're done repairing it and that 200 000 could be determined in two different ways if you're going to actually flip this property and sell it when you're done well then 200 000 is the value that you think someone would buy it from you for so in that case it's the sales price but on the other hand if you're not going to sell this property and you're going to renovate it and keep it as a rental property well then at that point instead of selling it you would get something called an appraisal done and that's where a professional comes out and evaluates all the things that you did to fix up this property and tells you what they think it's worth so either way whether you're going to sell it or you're going to keep it as a rental and get an appraisal your arv is your after repair value in this case we're going to call it 200 dollars so again a hundred thousand dollar purchase sixty thousand dollar rehab two hundred thousand dollar after repair value and method number one is to do this deal with straight cash the dave ramsey method if you've seen this video right here you know i don't like his methods and i'll probably have a bunch of his minions in the comments telling me off for the things that i'm going to recommend because doing 160 000 cash deal is probably not realistic for most people but we are going to go over it because it's going to give us a good baseline to base all of the other methods and our numbers off of so let's get those numbers down stick with me for a moment so let's imagine you've got a hundred thousand dollars to buy the property sixty thousand dollars to renovate it so you're all in for 160 000 and when you're done the property's worth two hundred thousand dollars we've got that now in a perfect world if you sell this and there's no fees or taxes involved you'd make forty thousand dollars your two hundred thousand dollar arv minus your 160 that you put into it you've got 40k left over so the first thing we want to do so that we understand how cash deals different from the other methods we're going to talk about is calculate our return on investment or what you could call your roi what you want to do is take the amount of money that you're going to make from this property if it's a flip and you're selling it you take the amount you make on the sell and if it's a rental property you take the amount that you make in cash flow per year so for now let's just focus on that forty thousand dollars as us selling the property so we take that 40 grand and to get our roi we divide it by the amount of money we put into the deal so in this case that would be the 40 000 profit divided by the 160 000 we spent to purchase the property and to renovate it and that equals 0.25 or a 25 return on investment that's really not a bad investment most people say the stock market returns somewhere around seven percent per year so 25 that's a really good flip you make 40 grand now of course you're gonna pay taxes and closing costs and stuff on that but for now let's ignore all that stuff and obviously coming out of pocket 160 000 in cash is not realistic for most people so another thing that you could do is instead of paying 100 of the cost out of pocket cash you could go to a bank and get a mortgage loan for this property and let's say you put down twenty percent and have the bank put down the rest of that eighty percent so this means on that purchase price of a hundred thousand dollars you put down twenty percent which is twenty grand and then you take a loan from the bank for eighty thousand dollars now you still have to have your 60 000 to renovate the property so you get 20 down 80 mortgage loan and then you put another 60 into the deal so you've got 80 yourself in 80 from the bank in now an 80 000 mortgage from the bank at let's call it a four percent interest rate is going to cost you somewhere around five hundred and fifty dollars a month or three thousand three hundred dollars for let's call a six month project when you sell you'll still make the same forty thousand dollars but this time your numbers are going to look a little bit different so let's break it down you sell and make that 40 grand but remember you had 3 300 of mortgage costs involved so you'll actually come out with 36 700 ignoring stuff like the capital gains taxes and closing costs and this time you didn't put 160 grand into the deal you put 80 grand into the deal and borrowed 80 grand from the bank so you take that 36 700 you made and divide it by your 80 grand that you put into the deal that gives you a 0.458 return or a 45.8 return which is a lot higher than that 25 because you leveraged the bank's debt to give yourself a higher return even though you made 3 300 less than you would have if you put 160 grand of your own money into the deal we won't go too much into the concept of leverage in this video but this is a perfect example of why people say that real estate investing and particularly borrowing money to invest in real estate is good debt paying that three thousand three hundred dollars in mortgage costs takes your 25 return to a 46 return it also means that instead of needing a hundred and sixty thousand dollars of your own money to do this you need eighty thousand dollars of your own money to do this so you can see that leverage is super helpful but most people probably also don't have 80 grand sitting around so let's go on to method two which is using a hard money lender hard money lenders are companies that work almost exclusively with real estate investors to purchase distressed properties where a bank will give you a long-term low-interest loan a hard money lender is going to give you a short-term high-interest loan so for our last example we said that the bank is gonna give you a 30-year mortgage at four percent a hard money lender is going to give you a six month mortgage at 12 so at first it doesn't make sense why anyone would use a hard money loan because they are way more expensive and you have a time crunch for how soon you have to get your project done but the benefit is they're created for real estate investors to get a higher return and they give you more flexibility in the strategies that you want to use first let's talk about the numbers then we'll talk about the different strategies that you can use with a hard money loan similar to a bank a hard money lender will give you about eighty percent of the purchase price you need to get a property so same deal you put down about twenty thousand dollars to purchase this one hundred thousand dollar property but unlike a lot of banks most hard money lenders will also fund 80 to 100 of the renovation costs for your project as well one of the properties that i'm flipping this summer is being funded by a local hard money lender who's lending me 80 of the purchase price that i need and 100 of the money i need to rehab the loan so for our example on this 100 000 house that means that you only have to pay twenty thousand dollars at closing to buy this hundred thousand dollar house and then you'll also be getting sixty thousand dollars additionally lent to you by the hard money lender to do the renovation and before we get more into the numbers i'll just pause here and say that this is why i'm so glad i started wholesaling first because wholesaling is a very low risk way of getting involved in real estate investing i find the property i hand it off to an investor for a fee and i get to learn so much about that process but if after i hand that deal off to the investor their roof collapses or they find something wrong with the plumbing that's not on me because i've already sold that property so it's very low risk but many wholesalers myself included are making 5 10 twenty thousand dollars per deal so just a couple of wholesale deals can get you not only the experience and connections you need but also the money so that you can make your down payment and then use something like a hard money lender to fund eighty percent of the purchase price and up to 100 of the rehab you need so back to our example the hard money lender is going to give us most of the money we need to get this project done but they usually charge 10 to 12 interest plus one to two percentage points and fees so for our example they're lending us eighty thousand dollars purchase sixty thousand dollars for the renovation so a total of a hundred and forty thousand at let's say twelve percent so sixteen thousand eight hundred dollars a year which is one thousand four hundred dollars a month and if this deal takes us six months to complete that's eight thousand four hundred dollars that we're gonna pay to the hard money lender to get the deal done but remember we also have to pay them let's say two percentage points which is basically an upfront fee for them to lend us this money so that 140 000 that they're lending us we take two percent of that that's 2800 on top of the 8400 we're gonna pay them in interest ouch but we can't stop there what does this mean for our return on investment let's say we sell for two hundred thousand so we've got a profit of forty thousand dollars but we have to pay back that eight thousand four hundred dollars of interest so that puts us at thirty one thousand six hundred dollars then we also have to pay our two points which was two thousand eight hundred dollars so now out of that forty thousand dollar sale after we pay our hard money fees we're left with twenty eight thousand eight hundred dollars but we only had to put twenty thousand dollars in so we take that twenty eight thousand eight hundred dollars that we make divide it by just the twenty thousand we had to put in because the hard money lender lent us the rest and that gives us a one point four four or one hundred and forty four percent return on investment with this one deal we've made more than we actually had to put into the deal that 12 doesn't seem so bad right to compare to our original all cash deal where we made 40 000 but had to put in 160 versus this case we made less we made 28 800 but we only had to put in 20. which one seems more realistic for most people and to take it a step further using a hard money lender lets you use something called the burst strategy which is something i talked more in depth about in this video right here the basic idea is that instead of using bank financing to purchase the distressed property and then renovate it you use a hard money loan to purchase the distressed property and renovate it and then when you're done you don't sell the property instead you now get bank financing use the hard money loan first and then you go to the bank and ask for something called a cash out refinance so that you can take the bank's money and pay off your short term hard money loan and now you have that long term low interest rate 30-year mortgage you rent out the property the rent from the property covers that mortgage you've paid off your hard money loan and now you cash flow each month that might sound a little complicated but for now check out this video where i talk about it more in depth and in a future episode of this first time flipper series i'm gonna break down all of my deals and why i think they're such good candidates for the burst strategy rather than selling them once i'm done with the renovation but to keep on our track with four methods that you can use to fund your deals we've talked about cash maybe not that realistic hard money which is made for real estate investors to purchase distressed properties so once you have a few wholesale deals under your belt you've got some experience and some capital to put down on the property not that hard to find a hard money lender to work with you that is what they do but method number three gets even better and this is working with a private money lender where hard money loan comes from a company that works with investors a private money loan comes from a wealthy individual you might think these people are hard to find and i did too but when i started out wholesaling i found that i was making so many connections with local investors that they could also connect me with their private money lenders and some of the investors that you're going to be selling deals to also do private lending as well because it's a way to stay involved in real estate investing but it's not as active as actually being out there making all the decisions they can just loan the money to you you go do the rehab and they still get paid in the form of interest two of my purchases this summer are being funded by a private money loan from a person that i met during my house hacking and wholesaling journey stayed in contact with and built a relationship with because private money loans are between two individuals and not necessarily official companies the terms of those loans are completely negotiable and up to the people involved a standard agreement might be something like 10 interest with no fees or points so for our example let's say the private money lender will fund the same amount as the hard money lender 80 of the purchase and 100 of the rehab or 140 000 so we're paying 10 on that 140 000 which is 14 000 a year or 1 167 a month and for the length of our six month project we're gonna pay seven thousand dollars in interest so when we sell the property for two hundred thousand we pay back our hard money lender the one hundred and forty thousand dollars we lent them we pay back ourselves the twenty thousand dollars we lent them and we've got forty grand left over but we still have to pay the hard money lender back their interest so we subtract 7 000 we've made a 33 000 profit to get our return we divide that profit by the 20 000 we had to put into the deal and that gives us a 1.65 or 165 percent return on investment that's even better than the 144 return we've got with the hard money lender because generally private money loans don't have as many fees and points attached that's why private money is generally referred to as cheap money and if you can build relationships with the investors and lenders in your market private money is going to save you a lot and help you get a higher return on your deals now method four is the one that i'm really excited to talk to you about so if you've stuck with me this whole way this is a true treat because it's something that i did not learn until very very recently when i first started learning about real estate investing four or five years ago i thought that residential loans were for properties one to four units let's talk about house hacking using fha loan for a triplex or a four plex cool and anything above five units was going to be a commercial loan and i was like i can't even think about that yet i'm still at this level let me think about what are my options with residential loans and that's what we talked about earlier putting 20 down if we don't want to go that route we could talk to a hard money lender a private money lender but i recently found out about a commercial loan that is made for the bur strategy and remember burning means that we're not going to sell the property at the end of the renovation we're going to rent it out and do something called a cash out refinance so keep that in mind but generally these commercial loans will still fund the same amount as our hard money in our private money lender 80 of the purchase 100 of the renovation so we still put in the same 20 to purchase the property but here's where things differ the commercial loan is set up as a six-month interest-only period while you're renovating the property and then it automatically converts to a mortgage a long term low interest rate mortgage that you would typically get when you go to the bank to buy property but the interest rate is the same that entire time so let's break it down because i think this is pretty cool we're borrowing that same 140 000 that we borrowed from the hard money lender and from the private money lender but this time it's at the same interest rate as our eventual long-term mortgage let's call it four and a half percent so instead of 10 with private money 12 with hard money we've got four and a half percent with our commercial loan and four and a half percent on that 140 000 loan is 6 300 a year or 525 a month and for the six month period of our project is and fifty 3150. and remember instead of selling this property for two hundred thousand and making forty grand the bank's gonna send out an appraiser and hopefully say that the property is worth that two hundred thousand now in this case the bank usually gives you eighty percent plus fees so that means that 200 000 they're going to give us 80 of that in what's called a cash out refinance so 80 of 200 000 is 160 000. we borrowed 140 000 during that six-month interest-only period so we pay that back that's paid off we put in twenty thousand dollars of our own money pay ourselves back that's done with plus we've now got the three thousand one hundred and fifty of fees that we have an interest we also get that back because it's generally 80 plus fees and so now we have an infinite return what do i mean by that so here's how the infinite return works the bank looked at the property it's worth two hundred thousand dollars they give us eighty percent of that in the form of a cash out refinance so we get the 160 grand to pay off the short term money that 160 000 cash out now becomes the amount of our mortgage to pay back over the next 30 years and so that mortgage payment will be somewhere around a thousand dollars a month let's say we rent out the property for fifteen hundred dollars a month now we have a cash flowing rental property we can still set aside two hundred 200 or so a month for future vacancy or repairs so now we have a cash flowing rental property that's paying off our mortgage making us let's say 300 a month or 3 600 a year so that's what we make a year and 3 600 might at first be like well i could have been making you know 40 grand if i sold it but 3 600 a year divided by what we have left in the deal which remember is zero when we got our cash out refinance it was 160 grand we paid back the 140 grand we took as a short-term loan from the bank and we paid back ourselves the 20 grand that we put in as a down payment so what is our investment left in the deal zero i remember this from math class that you cannot divide by zero and so in this case what that cash flow we're making every year is an infinite return because we have none of our money left in the deal and once you really get into all this stuff you'll find that there's some really cool ways to combine some of these methods you can use a hard money loan or commercial funding to pay most of the money you need to purchase and renovate the property and you can take a small private loan to pay the down payment portion you need and that's why people are able to get 100 funding because they're combining different creative strategies but you got to know about them first and you've got to work the math out so that you understand how leverage works and how these returns are working the options truly are endless it is 100 possible and that's what i hope this channel is showing you guys like i'm giving you everything like i'm just showing you what i'm doing and how i'm putting these pieces together from house hacking to wholesaling to now renovating and burning properties because you can figure it out and you can make it happen but it's not easy episode 3 of this series is coming up and i'm going to talk to you guys about all the things that are already popping up and going wrong with the property renovations so if you appreciate this look into how it actually works and how it actually starts then please don't forget to change the color of the like button turn on notifications so you don't miss episode three and i'll catch you on the next one

Channel: Lili Invests

Views: 85,697

Keywords: fund real estate purchase, how to find funding for real estate, how to buy an investment property, how to find funding for your first investment property, real estate investing 2021, how to start investing in real estate, how to flip your first house, how to start house flipping, brrrr strategy, wholesale real estate, real estate wholesale, real estate wholesaling, wholesaling real estate, lili thompson, lili invests, propstream, how to use propstream

Id: Ta-MHQ2dOqo

Length: 21min 7sec (1267 seconds)

Published: Tue Jun 22 2021