In this article, I’m going to share how a newbie can get a money partner to finance your deals.

The real question becomes how do you convince that person who has the money and the credit to become your partner. When I was starting in real estate, I partnered up with with a CPA who became a money partner for us. Prior to our introduction to this guy, we had already done several deals. We could show him that we had real experience under our belts.

We put together a presentation with our success complete with what we paid for our properties, what we had to fix them up, and what the cash flow looked like.

It’s not essential that you know the individual personally. In fact, I was introduced to that person by a mutual friend who put us together for a fee. Was the fee worth it? Absolutely.

I don’t think we would have been able to put that partnership together if we hadn’t had experience under our belts already.

You can use this approach if you already have that type of experience. All you need to do is put together a presentation like I did that shows people you know what you talking about.

If you don’t have that experience, does that rule out this approach? Absolutely not. You can still put together a deal like this.

It’s definitely not going to be a little tougher sale, but it’s not an impossible sale. I’ve seen my clients put together this type of deal and make money doing so.

What you have to do put together a good presentation. It will need to show the types of the properties that you would be Buying. You will need to put down specific information like purchase price. What you plan to do to rehab the property. You will need to show what the cash flow will be. Get tons of specific details worked out before your meeting. For example, have your contractors already lined up and ready to go.

The one thing that’s different is that if you don’t have a track record it’s going to be a lot easier to approach someone who is family or a close friend who really wants to see you succeed.

If you go in with this type of information and a lot of certainty that you can pull this off – YOU CAN. You’ll have a good chance of convincing your potential money partner to actually become your 5050 Partner.

In this article I’m going to give you my two top tips for getting financing if you are just starting out.

1) Find a Money Partner
The first tip I’ve got for you is to get into a partnership where you are doing all the work involved in the real estate transactions. You find the properties. You supervising the rehab. You provide for the property management.

The other party, your partner, will be responsible for all of the financing. That means they will put up the money and credit to fund the project.

But at the end of the day, you are 50% owner of these properties. The down side is that you are giving away half of the deal.

When I was just starting, for a whole year I bought ten properties with a partner in this manner. These properties were long term rental. I still on those partners those those properties in partnership.

2) Borrow from Friends and/or Family
The second tip is to rely on friend or family as a private lenders. Private lenders are cheaper than 50-50 partners in the long run.

However, most of the time it’s a great for you AND a great deal for the private lender. If they’re looking to make a good return on their money you can be an excellent opportunity for them. For example, if they’re going to the bank to buy a CD, they might only be getting 3% or less. But if you are borrowing that money from your private lender on real estate you can offer them 8% to 10% interest secured with a mortgage.

My private lenders have been critical to me since the banks have tightened up their lending standards.

Are either of these easy? No way. But if you are just getting your start as a real estate investor and want to buy properties for the long term, they represent a great avenue for you to get the financing you need.

The next question is how to approach a prospective private lender or money partner. I’ll leave that to another blog post.

He presented some excellent information on how to get private money from friends, family, and associates. And he told us how he had gotten his first private lenders by doing some limited advertising to bring together a group in which he did a presentation.

The presenter left us with the impression that we, too, could use do limited advertising within our own State to attract local private lenders as long as we let our State Security Exchange Commission know what type of advertising we intended on doing.

I was curious about these disclosures, so I contacted our Oklahoma Security Exchange Commission. The regulator I spoke to was very helpful. I described the type of mortgaged backed note that I wanted to offer. I asked him about what I needed to do in order to stay in compliance with Oklahoma Securities laws.

He referred me to Section 202 of the Oklahoma Uniform Securities Act of 2004. It states that “[a] transaction in a note, bond, debenture, or other evidence of indebtedness secured by a mortgage [is exempt from registration] if…a general solicitation or general advertisement of the transaction is not made.”

Section 202 therefore seems to indicate that if you plan to advertise in an attempt to attract private lenders in the state of Oklahoma, you must register the security with the Oklahoma SEC.

Registration is a big deal because of the cost and effort involved. In discussing this with a few securities attorneys, it appears that it would cost $20,000 to $25,000 in legal fees.

When I asked the SEC regulator about what can happen to someone who attempts to advertise an unregistered security, it didn’t sound pleasant. He suggested it would cost must more in legal fees for that person to defend themselves for such a transgression.

He said it almost always bankrupts a business when this occurs.

Clearly, one would be ill advised to pursue the advertising suggested by the presenter. Friends, family, and associates are still in play.

The question comes from someone who currently has a regular IRA with $25,000 in the account. 

For starters, if you want to use IRA for real estate investing, the first step is moving your IRA to a recognized custodial company that specializes in handling self-directed IRAs.  The one I’ve used for years (and recommend to others) is Equity Trust Company.  There web site is http://www.trustetc.com.  To get started with them, you need one of there redirection of investment forms. 

That company doesn’t have anything do with selecting an investment.  They merely act as a 3^rd part trust to handle the money. 

It turns out that this person already has there account with Equity Trust Company.  They were going to invest the money in real estate but then found out that they had to have non-recorse financing.  On a non-recourse loan, the bank required 40% down and 8,000 left in the bank to cover the investment. 

Let me explain non-recourse financing.  It means that the borrower is not on the hook for the investment personally.  Usually when you go to bank they require you to personally sign for the loan.  But you can’t sign personally for the financing when it involves an investment from your personal IRA because it is a retirement account.  That’s the way the laws have been written about about personal retirement accounts.  You can loose the money in that investment, but your losses can’t go beyond that. 

The way I see it, you have one of three possible choices:

1) You could just accept the banks terms.  That means you could buy a property for up to $62,500.  You would put $37,500 down.  The bank would also require you to keep $8,000 in your account just for safety sake.  As I said in the other article, you would probably not want to keep this as a rental property due to the lack of tax advantages from this type of investment. 

2) You could buy a property for less than $25,000 in total price so you could avoid the bank altogether.  You could do a wholesale flip or buy a property to finance out to another buyer. 

3) You could invoke some type of seller financing.  Just like with the bank, you must set up a non-recourse loan.  With this type of loan, you have no restrictions on how much of a down payment you MUST make.  In other words, you could buy a $100,000 or $200,000 property as long as the seller was OK with your down payment amount. 

4) You could loan money out of your IRA to someone else in the form of a secured mortgage.  Just remember that you can lend that money to pretty much anyone except yourself, your wife, or your kids. 

What other ideas do have for investing this money?  Write a comment if you can come up another option. 

The 2nd smartest investment I’ve made has been using a ROTH self-directed IRA to get into the lending business.  It was acutally a big mistake…at the time, I thought I was going to end up loosing my hind end on the deal.  Here’s what happened. 

I had a little bit of money I’d rolled over from a 401K plan.  By the way, if you are leaving your job in which you have a 401K, this is a very smart move as long as you don’t do something stupid with the money.  We decided to go ahead and pay the income tax on the money ONE TIME when we rolled it.  When you do so, it converts to a ROTH account.  That money can never be taxed again when you draw it out later in life. 

IRS does have specific rules regarding how you can use your self-directed IRA.  For example, you can’t loan yourself money to do a deal (or your company, etc.).  You don’t ever want to do something that might disqualify your account by breaking the rules because later on down the line you could be hit with a tax on the whole account.  And that would just ruin your whole day.   

You can buy real estate with that money.  It’s not really a great idea to buy rental property with this type of account because you don’t get any of the great tax benefits you do with a regular rental property.  

You can buy a property and flip it with that money. And That’s what we decided to do with the $30,000 or so we had in this account.  

So we found a property that we decided would make a good "retail" flip.  We bought the property, got it ready, and listed it.  And waited for it to sell.  And waited some more.  A year later, we were still waiting.   

We decided we needed to change our game plan.  We decided to sell the property for $50,000 on owner financing.  What that did for us was allowed us to capture the $20,000 increase in price.  An on top of that, we charged 10% interest on the loan. 

It didn’t take long to find someone willing to put $5,000 down on the house since we were willing to carry the financing.  

That was several years ago.  The money just keeps coming in like clockwork.  We loan out the money that comes back into the account to other investors for there deals.  In doing so, the interest accumulates interest.  

We wouldn’t even need to add more money to this account for it grow to several hundred thousand dollars within 20 years.  

However, we’ll keep contributing to it so that it reaches at least the million dollar mark within that timeframe.  

Do you have a retirement fund like this in which you’d like to earn a great rate of return?  If you are in Oklahoma, contact me about that and I may be able to put you onto the right track with that at scott at financiallyfreelandlord dot com.   

Part 1: The Three Keys to Every Profitable No-Money Down Deal

Part 2: If You Can’t Get Your Money Back in 6 to 12 Months, Why Do the Deal?

There are some sellers that you need to make all-cash offer to, such as offers on bank-owned properties.  In those cases, asking the seller to carry back the financing is an absolute waste of time, effort, and offer agreements. 

It doesn’t stop there.  Most people have been so conditioned by the “normal” way to buy real estate by realtors that asking for terms from the seller isn’t even a consideration. 

As a result, most real estate investors only negotiate on price when making offers on real estate. 

But when you are negotiating one-on-one with a motivated seller who has equity in his property, you can introduce any number of offers.

In his book “The 100 Absolutely Unbreakable Laws of Business Success”, Brian Tracy points out “the terms of payment can be more important than the price in a negotiation”. 

Price is only one factor among many others in a real estate deal.  For any real estate purchase, other factors include

1)      how much the seller plans to carry back,

2)      the interest rate of the note,

3)      the frequency of payment (monthly, quarterly, yearly, etc.),

4)      when and if a balloon payment is to occur,

5)      the length of time in which the note is paid out,

6)      any extras thrown in, like appliances, repairs, etc.

When you negotiate with a seller, you can use any or all of these factors when making offers. 

I’ve heard T. Harv Eker call a negotiation like juggling balls. 

When price goes down, some of the other terms go up.  That means more cash up front, right away.

When price goes up, some of the other factors go down.  That means less cash up front, more cash paid out over time. 

The important thing to remember of about no money down deals is that most people blow it when it comes to putting together the terms of a no-money down offer. 

On free and clear properties, I will almost always include an offer of the seller’s full asking price.  One of the corollaries of Brian Tracy’s law of terms is that “you can offer almost any price if you can decide the terms”.  So offer a high price, a monthly payment that will allow the property to cash flow, and a low interest rate. 

The trick is to make these offers every time you are in a position to make an offer to a motivated seller with equity.  Most of your offers will be declined, but you will jump for joy at every offer that is accepted. 

This is the second article in a series about no money down deals. 

Something that is implied by the term “investor” is that you use money to make money.  The problem with this approach in real estate investing is that most people I know have finite amounts of money.  Hello! 

If you put a 20% down payment on every piece of real estate you buy, you will soon be out of money. 

It’s even worse if you have to do a bunch of repairs to the property.  That’s even more money that you will have tied up in the property.

So how do the pro’s get arround having down payment and repair money tied up in the property? 

An alternative approach that’s I’ve used for years is to have some working capital that I recycle.  The beauty of this approach is that I don’t have my working capital tied up for very long. 

Phase 1 of this plan is to buy a property with cash.  Usually it needs work.  Sometimes, it needs LOTS of work.  Again, that requires money.  I’ll get that work done on the property so it’s move-in ready. 

Phase 1 takes anywhere from 2 to 6 months to complete. 

Then I’ll move to phase 2.  During phase 2, I’ll refinance the property once the work is done.  I’ll usually do this with a small, local bank.  True, that does mean that you have to have some decent credit to make this one work. 

But once you’re finished with phase 2, you have your original working capital back all over again. 

Not only that, but you have a property that is making you money. 

In Part 3 of the series, I’ll be telling you all the ways that you can expect to make money on this type of cash flow property.