In the classroom today, Dave Payerchin teaches us about raising money from private money lenders.
Find out how to get cash flow consistently from today’s expert, Dave Payerchin.
Mike: Welcome back to the FlipNerd.com REI classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Dave: All right, everybody, it’s your host with the most Dave Payerchin here in the REI Classroom and today we’re going to be talking about raising money.
Mike: This REI Classroom real estate lesson is sponsored by UglyOpportunities.com
Dave: Raising money: To a real estate investor that is music to our ears, that is the lifeblood of our business and it really allows any real estate investor to operate. If you think you’re going to get out there in real estate and use all of your own capital . . . I don’t care how much money you have, eventually, you’re going to run out. But you’ve got to get out there and raise money.
What we’re going to be talking about today is two different forms of raising money, raising money for buy and hold properties as well as raising money for flip properties. Now, I’m co-owner of Columbus Turn Key Houses. We’re the leading provider of turnkey investment properties in the Columbus Ohio market and we raise money for both.
We are real estate investors ourselves and we raise money to increase our buy and hold portfolio. I’m going to explain one program and I can’t take 100% credit for this. I got this from my very good friend Cleveland, Joe Lieber. If you’re listening, Joe, thank you very much. This works phenomenal for us, but we raise money on low-income housing.
Some of you listening to this are going to hear these numbers and think it’s just astronomical. That’s why you’ve got to get into the marketplace and start buying some of these things yourself. But what we will do is find a home that we can acquire for less than $20,000. This is a property that we could rent for $600 or $700 a month. Yes, as at $20,000, we can acquire homes that low here in Ohio.
What we will do is approach a private moneylender and we will raise the full $20,000 for acquisition and rehab. We’re all in for $20,000 and we borrow that money from a private investor at 9% interest amortized, principal and interest amortized over five years.
You’ve heard of 30-year mortgages, 15-year mortgages this is only a five-year note in mortgage. So we’ll have this investor paid back his $20,000 within five years and we’re paying 9% interest. What that means, obviously the shorter the term of a loan, the higher the payment. We don’t make a ton of cash flow on these $20,000 properties for the first five years. We’re not earning a ton of positive monthly cash flow and we’re pretty much breaking even is what we call it. We don’t even count on that revenue.
But everybody, the point of that $20,000 or less properties is we’re going to own these properties free and clear after five years. Plus, the investor that we raise this money from feels totally safe and secure. We never co-mingle funds, one investor for one property and we secure this investor’s money with a note and first mortgage. We never put second mortgages on our homes either.
That’s one example of buy and hold. And also, when you’re approaching a private moneylender, always let them know that their money . . . the house is the collateral. Also, use title companies or attorneys in every single closing that you do. We’re not writing IOUs on a napkin here.
Another program that we do for our flip properties, and by the way, everybody, we started our raising money from one individual year ago with a $50,000 loan. Since then, we’ve gone on to raise millions of dollars. So the trick to raising money is relationships. Another trick is coming through. You’ve got to come through. Don’t take this stuff lightly. Take it seriously. You want to make sure your investor is always paid no matter what. That is the lifeblood of your business here.
So when we’re buying a property that we intend to flip, we’ll borrow acquisition and rehab money so we’re 100% financed and we pay 12% to this investor. So that’s basically 1% a month. So if we, for instance, borrowed $100,000, it’s really easy to calculate. It’s $1000 a month interest-only payments. Of course, we borrowed money for acquisition and the rehab and then we’ll even cut that investor in anywhere from 5% to 15% of the net profit because we’ve got to make it worth their while.
Now, when you’re raising money, the key points here are to always make sure you secure your investor’s money with a note and a mortgage or a trust deed if you live in a trust deed state. And always make sure you are taking care of your relationship with your lender. Again, that is your lifeblood and don’t hesitate to ask your lenders, do they know any friends or families who also want to earn an above-average return on their capital.
Another good source to find private moneylenders, everyone, is your escrow agent or title company. If you’re out there closing multiple deals with them, then they know other people who are out there closing deals. They know people who have money. Title companies and Escrow agents are a great source for capital. Also, a lot of people don’t talk about this, but what about your seller? Let’s pretend you bought a home for $100,000 and the seller owned that property free and clear. You’re giving them $100,000 at closing. Ask them what are they going to do with that money. If they’re going to stick it in a bank, ask them if they’re open to lending that money because you as a real estate investor will pay them much more than any bank is willing to pay as far as interest goes.
With that being said, this is Dave Payerchin here in the REI Classroom and we’re talking private money. We’ll see you on the next video.
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