Wednesday, December 6, 2006

Funding Real Estate Purchases

I think there are at least 3 keys to success in real estate (and I don't mean "location, location, location, although if you do live in a growing market you can invest successfully with less knowledge). Marketing (how much you expose your business to the "right" type of clients), funding (getting adequate cash for your deals) and management (having the knowledge and organization skills to do it correctly)

I am currently trying to figure out how to fund my real estate ventures. The first house I purchased this year I used conventional financing. Of course, the bank wanted 20% down and did not provide any money for rehab, so I took out a HELOC on my house to borrow the downpayment as well as to finance repairs, holding costs, etc. Now that money is all used up and all of my equity is in the rental property (My home 1st & 2nd combine to slightly more than my house is worth). I have no cash reserves to speak of and my cash flow is pretty tight. All I have going for me is a very good FICO score (700+).

One option is to try to find only sellers that will finance the property, but usually these types want 10-20% downpayment and I have no cash on hand. Some people talk about trying to find private money, i.e. money from people with cash that will lend you (for example via their IRA's). I do have some relatives with IRA's and such but am not comfortable borrowing from their holdings at this point.

Which leads me to hard money. This is pretty expensive. But generally, if your credit score is high enough (and mine is) you can essentially borrow all the money to purchase, rehab and hold while selling without any of your money. This comes with a high price - generally 6-8 points as well as 15-18% interest. I've looked at a couple of websites (e.g. Brookview Financial and Rehab Funding )offering rehab funding of the type I am looking for and am contemplating whether to take this risk. They want a commitment of 1% of the line of credit, so for a $500K line thats $5K. If I do this, I better find a deal

One alternative is Community Preservation Corp, which specializes in rehab funding. Interest rates are lower (8%) and so is closing points. I applied several weeks ago but they have yet to let me know. They are afraid I won't have the cash flow since they don't fund the holding costs. You also need 10% down on the purchase price and have to pay 20% of rehab costs so this is not easy money for me to come up with.

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