Since we don’t use banks, how do we fund our deals?
Do banks have money to lend? Think carefully – this could be a trick question! Don’t banks “borrow” the money they lend from their depositors? And why do depositors keep their money in the bank? Because it’s the safest place to keep it, right? But is it really?
What interest rate is your bank paying on savings these days – 0.3%? And what is the current rate of inflation…something like 4%?
Here’s a broad-brush picture to help you understand what’s really happening. You put $10,000 in the bank earning 0.3% interest. One year later, your nest egg has grown to a whopping $10,030. But let’s not forget about inflation. In reality, after you factor in inflation, the actual buying power of your $10,000 dropped by 3.7% to $9,630! What – you LOST money?
Inflation is called the “invisible tax.” You can’t see it, but you sure can feel it every time you walk in a store!
Sure, the days of banditos like John Dillinger, Baby Face Nelson and Pretty Boy Floyd are long gone, but they were replaced by something far more sinister: The Federal Reserve. We strongly encourage you to read The Creature from Jekyll Island – it’s a real eye-opener!
So how are we funding our deals? By offering to pay our private money lenders a much higher interest rate than they’re getting from their bank, and securing the loan to real estate. Think of the bank as a middleman – and we’re cutting the middleman out! The result: Our lenders get a much higher rate of return than banks offer, and we get a lower interest rate than banks charge. Win-win!
This isn’t the only way we fund our deals. Here are two more creatively funded deals we’ve done.
We bought a house off Grassdale Road in Cartersville, Georgia, which the owner was holding free-and-clear as rental property. He was tired of being a landlord. The owner’s asking price was a bit above fair market value, which meant I couldn’t get a mortgage unless I put down a sizable down payment – which I didn’t have.
I offered to pay his asking price, if he’d give me owner financing with monthly payments of $400. This would allow the rental to cash flow. A few days later, we closed at the very handsome Lee Perkins’ office. I got the property, and the seller got a thirty-year 4.43% interest note with payments of $417. This was a great win-win deal!
Now let’s look at a Lonnie Deal we did in 2008. (NOTE: With a Lonnie Deal, you buy a mobile home in a park for cash, and then sell it on time.) The seller offered to sell for $11,400. Because I didn’t have the cash, I offered to put down $3,000 and give him an $8,400 note with monthly payments of $100 until paid.
The seller accepted. Only one problem: I didn’t have the $3,000 down. I called an investor friend and made this offer: If he’d put up the $3,000, I’d give him half the deal. I’d manage it, which meant he never had to do anything. I also promised that he’d get all net money out of the deal until his $3,000 was recovered. After that, we’d split all net proceeds 50-50. He agreed to the deal and we’ve been splitting $300 a month ever since!
With these three examples, you’ve seen me use a private-money lender, get owner financing and finally, bring in a money partner. What you didn’t see was me going to a bank. Please know that I’m not against banks. It’s just that I’d prefer to work with people instead of banks and their mountainous pile of paperwork and unbending government regulations.
Hope this helps you to see that with real estate investing, there is no box!
Source: How Do We Fund Our Deals?