If you have wondered if you can still profit from a property investment while utilizing financing, the answer is typically yes. Read why, as Gary Keller, author of The Millionaire Real Estate Investor explains why even a $1 profit per month is acceptable.
How can you determine if you should get a loan on an investment property? Does it make sense financially to invest if you have to accrue debt to do so? We get this question all the time, and the truth is, there is not one universal answer.
If you’re familiar with the way we invest, you’ll know that our main focus is on ROI. What we care about in an investment, above all else, is meeting an ROI between 10-12%. When you’re considering taking out a loan in order to invest in real estate, you still want to earn a high ROI, even with your debt in place.
In most cases, it doesn’t make sense to invest if you can’t make a profit. Even if you can make a profit as small as one dollar per month, then the investment can work for you. Over time, you’ll be able to pay off your debt service, and then you will have a larger profit.
This ties into Gary Keller’s model, the Three Stages of Real Estate Investing. If you’re a new investor, you’re in the first stage, “Buy.” In this stage, you shouldn’t be too concerned with making money, which I know seems counterintuitive. This stage is simply about building your net worth, so it’s okay if your rental payments are going toward paying off your loan. Hear more about the Three Stages of Real Estate Investing on episode 15.
In order to be certain that debt servicing on an investment is a wise choice, you’ll have to run some calculations. That’s why we’ve put together a spreadsheet to help! Here’s how it works: you’ll enter the total amount of your loan, the monthly rent of your property. This will give you your adjusted monthly rent. Then you’ll input the terms of your loan. If your investment can produce even one dollar more than your monthly loan payments, chances are, it's a good idea to move forward with the loan.
If you're interested in purchasing your next real estate deal via private financing, it can be difficult to know where to start. How do you find a private lender? What terms should you ask for? Should you find a lender or a property first? I know that these questions hang up a lot of investors, or would-be investors!
That's why I'm sharing three resources you can use to dive deep into the world of private financing, build your confidence, and secure your next deal! If you've ever been hesitant to enter the world of private financing, this is for you!
- Getting the Money by Susan Lassiter-Lyons. Susan Lassiter-Lyons is the queen of private money. Seriously. She's raised over $26.2 in private capital, and she's made it her mission to teach others how to reach their goals via private financing. Getting the Money contains tons of great strategies for securing private lending, getting in the right headspace, and so much more.
- Private Money Series. Over on the Morris Invest YouTube channel, I've created an entire playlist about finding private money. You'll learn how to create a credibility one sheet, how to decide how to compensate your lender, and you'll even see me set up a lunch meeting with a private lender.
- How to Secure Your First Private Money Lender [Case Study]. If you need additional motivation, you'll love this first-hand account of how a novice investor secured his first private money deal. On episode 59 of Investing in Real Estate, new investor Pablo shares how he sealed the deal! You'll hear all the details on how he did it, interest rate, repayment plan, and how to construct a mutually-beneficial note!
Are you interested in accelerating the growth of your portfolio? What if there was a way to pick up a group of properties, rather than slowly accumulating properties one by one? I have excellent news for you; there is a way! It’s done through securing a portfolio loan.
In residential real estate, a portfolio loan is a means for investors to acquire multiple properties, simultaneously. Portfolio loans can be secured through either financial institutions or private lenders. The amount of the loan is based on the value of the collective properties.
A portfolio loan varies vastly from a primary home mortgage; they’re two totally different products. You might use the same terminology, like interest rate or pre-payment penalty, but that’s where the similarities end. The best way to approach a portfolio loan is to remember that the terms will be much different than other loans you’ve encountered.
If you’re expecting an interest rate of three to four percent, because of your experience with a mortgage, you’ll be sorely disappointed. A portfolio lender will typically lend at a rate between six and twelve percent. The rate varies dependent on the down payment.
If you’re looking to expedite the growth of your real estate business, a portfolio loan might be a great option for you. If you want to hear my personal experience with portfolio loans, including down payments and interest rates, head over to episode 58 of the podcast.
If your credit score is less than stellar, you’re not automatically disqualified from investing in real estate. Sure, you might have to get creative and figure out how to get funding, but it is possible! I’ve talked to plenty of investors who were able to get started, even with obstacles like bad credit and no money.
Here are a few ways you can purchase your first rental:
Private money. Private money refers to any money that you borrow from a non-bank on your own terms. This could be money you borrow from a friend, relative, or another investor. Private money is a fantastic way to get started, because typically a savvy investor will care more about the deal than your personal credit score.
Seller financing. If your credit score is holding you back from applying for a traditional mortgage, seller financing might be a great option for you. Unlike a big name bank, a seller can negotiate terms. It’s a great opportunity for the buyer to invest with no money down or a low credit score. Head over to the podcast to hear more about seller financing!
Hard money lenders. Hard money lenders are like bankers, but they set their own rules. They lend money with less strict standards than the banks because they are not regulated by the government. They don't care as much about your credit score and they don't limit you to one investment at a time. They lend on the merit of the deal and they can close funding much faster than a traditional bank. One drawback to hard money is that it typically has a higher interest rate.
401k loan. If your employer offers a 401k plan, you might be in luck! Since your 401k is your money, you can take a loan from it. There are a few limits, but your credit score isn’t one of them! This is a strategy I use yearly. It's a fantastic strategy, because you’re in essence, paying the interest back to yourself. You can learn more about this strategy here.
It’s worth mentioning that this is not an exhaustive list. I truly believe that if you want to invest in real estate, you can make it happen! If you feel like these options won’t work for your individual situation, check out our podcast episode about paying off debt, as well as this post on creatively financing your real estate deals!
5 Must-Read Books for Real Estate Investors – Our most popular blog post ever operates on the basis that you don’t need to read every single investing book on the market to be successful. I’ve collected 5 must read books about the best investing strategies, taxes, and business principles to help you jump-start your investing venture!
5 Most Landlord Friendly States - Before purchasing a rental property, you’ll want to be informed on how lease agreements, security deposits, and evictions will be handled in that state. The implications can be substantial, so you don’t want to overlook this list!
How to Secure Funds to Purchase Rental Properties at Zero Percent Interest - It’s not often that I find a rental strategy so incredible that I HAVE to share it. If you’re looking for a way to purchase a rental property, whether it’s your first or hundredth, this strategy can help you grow your portfolio.
How to Invest in Real Estate with None of Your Own Money – This post is one of our oldest, but it’s timeless! If you want to invest in real estate but you don’t have money, this blog post is for you!
10 Tax Deductions for Real Estate Investors - My favorite tax accountant Tom Wheelwright likes to say, “if you’re a real estate investor and you’re paying taxes, then you’re doing something wrong!” One of the top benefits of real estate investing is the enormous overall implication on your tax burden. This post outlines five tax deductions you’ll want to consider!
The Real Estate Investor’s Guide to: The 4-Hour Workweek by Tim Ferriss - New York Times Bestseller, The 4-Hour Workweek by Tim Ferriss is chock-full of useful information about living a deliberate lifestyle, and allocating time intentionally. This aligns perfectly with real estate investing. As you know, real estate investing is the best way to earn passive income and attain financial freedom.
The Real Estate Investor’s Guide to: Rich Dad Poor Dad - Many successful investors who I’ve interviewed for the Investing in Real Estate Podcast have something in common—they struck inspiration after reading Rich Dad Poor Dad by Robert T. Kiyosaki. If you’ve read the book, this should come as no surprise. In fact, it’s touted as the #1 personal finance book of all time. Check out this post to hear why this book is the guidepost for real estate investors.
How to Replace a $70,000 Salary with Passive Income through Real Estate Investing - What if you could replace your salary from your 9-5 job with passive income through real estate investing? You might think this sounds like a tall order, but it’s actually quite attainable. I’ve done it, and I’ve watched other investors do it too. All you have to do is follow a simple formula, and you’ll be earning a passive income in no time!
Flipping Houses vs. Owning Rental Properties - Flipping houses and owning buy and hold rental properties are two of the most popular real estate strategies. These two strategies work very differently, and generally I recommend that you choose one path. This post is designed to help you choose the right strategy for your lifestyle.
How to Evaluate Debt Service on a Rental Property – One question we always get is, “how do I maintain positive cash flow if I have to pay back my loans?” If you’re financing a rental property, you’ll want to make sure your deal covers those expenses! This blog post is here to help! Bonus: free spreadsheet included!
Have you ever wanted to purchase buy and hold properties, but felt confined by the structure of traditional mortgages? Maybe you have little to no money for a down payment, or your credit score is holding you back from qualifying for a bank loan. Luckily, there is another way! Seller financing is a unique, creative, and incredibly practical means of purchasing rental real estate.
For many real estate investors, the key to success is being creative. For most of us, money is not an unlimited resource, and traditional credit has its own confines. In order to build a robust portfolio, many investors consider seller financing as a viable option.
Seller financing is a great option for any investor that has no money to put down, has a low credit score, or simply wants more flexibility and freedom than the traditional loan structure can provide. Unlike a big name bank, a seller can negotiate terms. It’s a great opportunity for the buyer to invest with no money down.
Many people wonder why an owner would be interested in seller financing. Motivated sellers drive the investor market; it happens all the time. People have extenuating circumstances that drive them to want to sell their properties as quickly as possible. It could be anything from relocation for a job, or family emergencies.
Constructing a seller-financed deal can also be beneficial for the seller. Seller financing provides a more flexible term and payment schedule. Not to mention, the interest rate is negotiable; this is a great opportunity for a seller to construct a deal that contributes to his or her own financial goals.
Additionally, when you’re dealing with human beings, you don’t have to worry about strict bank policies. To hear my personal experience with seller financing, check out episode 151 of Investing in Real Estate!