No Money? Creative Ways to Fund Your Next Rental Property (Rookie Reply)

Ashley:
What if the real reason you’re not buying deals has nothing to do with the market and everything to do with how you’re approaching money, deal flow and funding.

Tony:
Today we’re answering three questions from the BiggerPockets forums that hit the exact pain points that rookies just like you are struggling with right now, getting deals without a bunch of capital, finding quality wholesalers to find you the right deals and knowing when to line up your financing.

Ashley:
This is the Real Estate Rookie podcast. I’m Ashley Kehr.

Tony:
And I’m Tony j Robinson. And our first question today comes from Victoria in the BiggerPockets forms and Victoria’s question is, I’m curious about what methods you all are using to acquire investment properties without a ton of capital upfront. There are so many strategies out there partnering with private money lenders, joint ventures, creative financing assignments, subject to seller financing, lease options and more. It would be great to hear from investors actually doing deals right now about what is working in today’s market, which strategies you like best and what pitfalls to avoid when using little to no money down approaches. A few questions to kick things off. What methods have you successfully used to acquire properties without large amounts of your own cash? How did you structure the deals, roles, profit splits, risk and protections? How would you do it differently if you were starting over with limited capital today?
Looking forward to learning from everyone’s experiences. Alright, so the question is how do you get into a deal with little to no cash of your own out of pocket? I think the first thing that I’ll say is that everybody listening probably wants to do a lot of deals without using any of their own money, right? That’s the golden goose for building a real estate portfolio is the ability to leverage other people’s capital. That said, I think a few things have to be in place first before you can successfully do that. Number one, it helps to have some sort of track record. If you can show people that you can be a good steward of maybe your own capital first, it makes it more competent for them to actually give you their own capital in a deal. But if you’ve got zero real estate experience, I’m not saying that it’s impossible, but it is a slightly bigger hurdle to get over if the first deal that you’re doing requires you to get someone else’s capital.
So just keep that in the back of your mind that if you’ve got a track record, even one or two deals, that helps build confidence in other people, then you can replicate that with their own money. The second thing that I’d say is even if you are using someone else’s capital, not your own, there’s still I think a certain level of financial cushion that you want to have in case the deal goes sideways. If you guys go over on your budget, if unexpected expenses come up, whatever it may be, if there’s a month where occupancy dips lower than what you had anticipated, it’s still good to have some form of reserves for yourself just in case things hit the fan. So just two big ideas up front for me. Ash, what are your initial thoughts on the question?

Ashley:
I, one other thing along with finding out your path, your strategy and what you’re going to do is once you at least know your strategy, build your buy box. But when you’re looking at different ways to fund the deal, I think you should have multiple options. Instead of just saying, I’m just going to get a bank loan, I got pre-approved and that’s the only thing I’m going to do is look at other things. So you can submit multiple offers on the deal, so you have multiple opportunities to negotiate. So oftentimes I will submit an offer with bank financing. I will submit an offer with seller financing. I think seller financing is a great opportunity to get a deal with low money into the deal and be able to negotiate the terms so it’s more beneficial for you. And I think if you limit yourself to only thinking about I need to set aside one funding strategy and stick to that is going to limit the deals that you can do.
So try and find out if you can line up a private money lender that maybe you will or won’t use. Look at how you would structure seller financing for a deal. You can do as many different offers as you want. And the thing I love about doing multiple offers is it makes it the buyer’s decision. Everybody loves to make their own decisions. So I’m sorry, the seller’s decision. The seller will get to decide which offer they want to choose, and everybody likes to make their own decision not be told what they’re going to do. So that kind of gives you some negotiating power there.

Tony:
But to answer the question of what methods have you used, I’ve used 100% bank financing. So my first few deals were 100% funded by a local bank that I found, and I know investors today that are still using forms, that form of financing. Now usually that requires finding deals and need some renovation and some rehab. So there’s some margin in there, but call every single bank in whatever market that it is you’re thinking about and see what kind of loan products they offer that are low or no money down. I’ve also used private money where I’ve worked with private investors to fund my acquisition, the rehabs. I know other folks who have used private money in combination with hard money. I just think that if you are going to raise capital from someone else, especially in your first few deals, I would maybe focus on transactional real estate.
So something like flipping where you can kind of get in and get out in six to 12 months and also walk away with a bigger chunk of cash because then that will position you better moving forward to maybe start doing some of your own deals. So the bigger question isn’t does this work or can I get someone else’s money? I think the bigger question that most folks struggle with is how can I go out and identify those people that would be willing to work with me? So I would invest a lot of my time, effort, and energy into building your network, meeting folks who might have the capital but not the time or the desire to do these deals themselves and figuring out how you can align yourselves with them to make it a win-win situation for both of you.

Ashley:
And then to address the question of what would you do differently if you were starting over with limited capital? I actually really like the way that I started. I took on a money partner who funded the whole deal. I set it up so that it was 50 50 equity, but also they were being paid back principles. So the capital they invested into the deal plus five and a half percent interest over a 15 year amortization. So this was a really sweet deal for them and it was my first deal. So I wanted to give someone more sense of a security. So they were getting all their money paid back over time and they were getting equity in the property and 50% of the cashflow of the property, which I will say was pretty minimal at first to start, but it was their first deal and my first deal.
So I think if you are starting today and you’re looking at what to do, the biggest thing is for me that really helped me was not being worried about giving up too much in the deal. If you don’t get a ton of return or you give up equity or you give away a portion of the cashflow, this first deal doesn’t have to be a huge money maker. And even if you’re doing a lot of the sweat equity, which I was a property manager, I found the deal, I did everything for the deal, but I gave up a lot just to get started just to get that first deal. So don’t overcomplicate it and don’t overthink it when you’re purchasing that first deal with a partner that it’s okay if they end up getting the better end of the deal because it’s the way that you got started and you can grow and learn from there.
It’s one deal that you’re doing with them. The next deal, you can negotiate the terms. I still have that first partner and when we do a deal today, it is very, very different. I make out on the sweeter end of that deal because I am the one doing all of the work and I know what my value is because of all the experience and the things that I’ve learned, but they’re still being able to invest in real estate and have to do very, very minimal work. So it still works for them also too. So coming up, everyone says build relationships with wholesalers, but how do you actually find the good ones without wasting months chasing bad deals? We’ll dig into that after a quick word from our show sponsors. Okay, we’re back. And our second question is, I have been investing for two years now.
Since then I did my first project and looking to do multiple ones this year. Congratulations on your first one. And I’ve been trying to connect with solid wholesalers so far. Most of the deals I’m coming across aren’t a good fit. I post regularly in the Facebook groups, check investor lift and stay active in the community, but I’m clearly not reaching the right wholesalers yet. What might I be doing wrong? And where do experience investors usually find reliable wholesalers who consistently bring real workable deals? So I’ve never bought a property from a wholesaler, but I am on a bunch of buyers list they call it, where wholesalers keep a list of their buyers. When they get a deal, they send them out. So here’s the three ways that I would find a wholesaler is one I would go to in-person meetups in your network, wholesalers will be there.
Sometimes they even bring deals in a clipboard for you to sign up if you want to get on their buyer’s list. The second thing is if you’ve ever gotten a text message from somebody who wants to buy a property, maybe your primary residence or maybe the investment property you already have, respond back to them and say, no, I’m not interested, but I’d like to be on your buyer’s list. Most likely they are a wholesaler trying to find deals. So usually I just have to give them my email address and I’m on their buyer’s list. You could also tell your friends and family that they could if they get one of those messages, to send the contact information your way and you’ll go ahead and respond with your information. And then the third thing is Googling. So whatever market you are investing in is Google, sell my house fast, buffalo, New York, or whatever your market is. And all of the wholesalers will usually come up like we do cash offers, things like that. And you’re going to message them and instead of being somebody who wants to sell your house, just let them know you are a buyer and you would like to be on their buyer’s list.

Tony:
Great points. Ashton, I just want to highlight why most rookies might not ever even see all of the really solid wholesale deals. And it’s because what wholesalers really value is certainty in the person that they’re working with, right? They’ve got this property in their contract, they’ve already made commitments and promises to the seller. They want to make sure that whoever they go under contract with has a good chance of actually closing, right? Otherwise they sour that relationship with the seller and they might end up losing the deal. So oftentimes what you’ll see wholesalers do is that before they email out their entire list, they’re picking up the phone, they’re calling or they’re texting, they’re trusted and closest buyers to say, I just locked this up. Here are the details. Are you interested? And oftentimes only if those buyers pass then does it go off to their larger list.
So the question for you isn’t even necessarily, how do I find more wholesalers? Because it sounds like you’re doing all the right things. The question is how do I get into that inner circle so I can be on that short list of what buyers or what wholesalers are actually looking for? And I think there are two ways you can do that. Number one is just continue to build a better relationship with those wholesalers. Don’t just wait for them to send you deals. Just reach out to them every once in a while. Let them know what you’re up to. Give them more certainty on what you’re doing in your business to position yourself. Tell them, Hey, look, I just raised 300 K that I need to deploy. Do you have anything that I can buy right now? Right? The second thing you can do is maybe take a deal that has slightly smaller margins just to build that relationship with those wholesalers.
So if you’ve got a minimum goal on a flip of like, Hey, I want to make a hundred K on a deal, maybe take a deal that gives you 30 k. If it means building a better relationship with that wholesaler. So I think the bigger question is not how do you get more volume, but how do you build a deeper connection with the folks who are already wholesaling in your chosen market? Alright, we’re going to take a quick break before our last question, but while we’re gone, be sure to subscribe to the realestate Rookie YouTube channel at realestate rookies where you can find us and we’ll be back with more right after this. Alright, we’re back and let’s hear. Our last question was come from Brandon and the BiggerPockets forum. So Brandon says, question four, active investors here. Do you prefer having financing options ready before submitting offers or do you secure funding after you have a deal locked in?
Pros and cons to both? Curious to know how you would approach it. My answer is going to be pretty quick and straightforward on this one. Ash. I prefer to know what my purchasing power is before I invest a lot of time searching and hunting for deals. Because what would suck is that you find a great deal, you get it under contract, you try and go get your financing, and they’re like, Hey, this deal is $500,000, but you can only get approved for $200,000. Now you’ve just wasted a lot of time, effort, and energy on deals that you actually had no ability to close. So for me, I feel like one of the very first steps, even before you really focus on a market is understanding what is your purchasing power? How much cash do you have on hand? How much can you deploy into a deal? And what kind of loan amount can you get prequalified for?

Ashley:
It’s definitely so much easier to go that route, to be prepared and to know ahead of time to be able to get your deal done. There definitely have been a lot of times where I’ve found the deal and I’ve then figured out the financing, maybe because I wasn’t planning to buy a deal, but the deal is too good to pass upon or whatever the reason may be, or it came up upon a second deal or something that I wanted to take on at the same time. So it’s important to have options, I would say. So figure out different ways that you can pay for things. And even though you may not use all of them that first deal, at least know what are the steps to take. So getting pre-approved is a great choice. Having somebody that’s lined up as a private money lender, it’s definitely easier to make the offer and get the offer accepted too when you can have proof of funds or proof of financing.

Tony:
And a lot of sellers, they won’t even entertain an offer if you don’t have some sort of pre-approval letter attached to that offer. So I think a lot of times your hand is kind of forced into get into financing, at least somewhat figured out first.

Ashley:
This off market deal that I’m doing right now, I actually got the pre-approval letter and everything when I got it ready to submit my offer, and I was waiting to submit the offer to get the preapproval, and I submitted the offer with anticipation that I would have the proof of funds within the next 24 hours. So when they asked for it, I’d have it ready. They didn’t ask for it, but it still was good peace of mind to know I have the financing lined up or whatever.

Tony:
And just one last point on that too, Ash, you talk about off market. We just had a question about wholesalers. Even for wholesalers, a lot of times they’ll want a non-refundable EMD just to lock the deal up. So if you go out and you put down 5, 10, 20, $30,000 as a non-refundable EMD, and then you try and go get the financing only to figure out that you can’t, that’s a tough spot to be. And so I would strongly encourage every rookie to try and figure out your financing first.

Ashley:
Well, thank you guys so much for joining us on today’s episode of Rookie Reply. If you have questions, you can always join us in the real estate rookie Facebook group, or you can message us on Instagram at BiggerPockets Rookie. I’m Ashley Houston, and we’ll see you guys next time.