OPM is one of the best parts of real estate investing. That contract gives you tax benefits, appreciation, and cash flow while someone else pays off your debt.
IceCap Group, a direct private lender in New York City, VP of originations Brian Stark helped me write this post. Brian has lent to real estate investors countrywide for 20 years as a private lender. He originated over 1,400 real estate loans and sold hundreds of homes.
Since financing is changing rapidly, I questioned him about it. In today’s lending environment, learn how to invest in real estate with other people’s money.
What are the biggest lending changes today?
Brian says investment rates are still down, but not negatively. Due to high investment activity and lender rivalry, they’re even falling in some locations. Everyone feeds borrowers, lowering rates. Consumer interest rates are rising, but investment rates are constant or falling.
Lending gives yield to so much money that can’t find it. I was startled when Brian told me rates remain constant. I wondered if private lenders were more affected than Fannie and Freddie.
Brian described two buckets: Fed money like Freddie and Fannie institutions and private lenders. In the last five or six years, multi-billion-dollar firms that have raised massive rounds of funding have become private lenders.
Hedge funds, private equity firms, and large private institutions lend to real estate investors for fix-and-flip and buy-and-hold ventures. These companies are usually not regulated by the US government or stockholders.
The owners of these companies may say, “Hey, let’s get into this business,” one morning. Lower rates. Increase LTVs. Let’s compete. 50 more borrowers this month. Let’s do another $50 million this month.” Since it’s their money, they can cut rates quickly.
Business-to-business financing regulations
Business-to-business lending is regulated like you and I. We cannot speed or steal cars. These companies are heavily regulated, but business-to-business lending is not. Many states have less regulation, and these corporations avoid the six states with a lot.
California, Arizona, Nevada, North and South Dakota, Utah, and Alaska regulate the most. Puerto Rico is also difficult because it’s a separate business.
Private lenders cut expenses how?
Money costs less in many ways. “Hey, our rates are low—5%,” is one kind. 4.75% presently. Oh, 4.5%.” Lowering fees, closing faster, and increasing leverage lowers money cost. We’ll lend 80%. Oh, 85%. 100% loan.” Those factors are making more money cheaper. Over $2 trillion needs a home. Investors’ bank-deposited cash.
Since $5 trillion was created last year, this is expected. Real estate is its preferred destination.
How can you start or buy more real estate with other people’s money?
1. Good credit
You need good credit, cash, and education to invest in real estate with other people’s money. Before approaching a private lender, you must have good credit—at least 650 and ideally 700 to 720. This is vital, not personal. Lenders must be able to sell their loans to their own funds, a cash management structure, Wall Street, or other institutions to use the money to create more loans.
2. Have money
Private lenders also want cash. There are various methods to invest in real estate without money, but private lenders require liquidity. These organizations prefer to work with someone who can prove they have the money to cover their six-month payments, closing charges, origination fees, and a little extra. They won’t lend to someone who will be broke by month two.
If you’ve never invested in real estate (with or without other people’s money), learn. Take a course, attend a workshop, find a partner, or join an investment club like RealWealth to help you acquire. Jumping into any business solo, as a newbie, having done little, and possessing little is asking for problems. Mistakes are simple. Doing the first 6, 8, 10 deals with a pro is amazing.
When to invest in real estate?
Real estate investing was the best yesterday. Start whenever you want. Start now. Start, figure out, go. To find properties, negotiate deals, and generate equity, real estate requires time.
Start investing and educate yourself. But balance what you learn against those wanting to sell you courses that may or may not be good. Spend as much time as you can with corporate success stories, not pretenders. It doesn’t matter what watch, shoes, or automobile they drive, paid for or not. Check their assets.
Brian knows a $100 millionaire who wears t-shirts, sandals, and shorts. In Malibu, we often meet homeless people who are actually billionaires. Ha!
People who appear poor frequently have the most assets. Spend time with these people to learn.
What prevents real estate investment?
Many reasons prevent people from investing. Fear, especially today. People worry the economy will collapse. They believe prices have risen too long and will cause another 2008.
It’s likely to happen, but when is unknown. But this shouldn’t frighten you. Crashes are inevitable in a cyclical economy. So what? Deals abound. Be careful, don’t borrow too much, and don’t leverage yourself. Keep cash and credit strong. If the economy tanks, acquire additional investment property.