#032: Funding Equals Freedom Series – Part 2

Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and you’re investing with The Accelerated Investor Podcast.

So, hey, welcome back to Accelerated Investor. This is part number two in our private money, private investing, private money partner series. I’m looking forward to talking to you about this because this is my favorite part of real estate. A lot of people like finding deals. Some people like talking to motivated sellers, some people like finding apartment buildings and cashflowing deals. I love the money because funding equals freedom.

And if you miss part number one, go ahead and go back and go ahead and listen to that. We talked a little bit more about what is a private investor, what is a private money partner? And we talk a little bit more about some of the things that you’re going to learn in this series. And the reason why a lot of my students and clients are really excited when I coach them on raising private money because funding equals freedom.

Getting access to capital equals freedom. And today we’re going to talk a little bit more about what are the problems with hard money lenders and banks and what we call institutional private money. You know, when I think about private money partners, and when I think about private lenders, I think about the people that have money in their 401k, their IRA, they have cash on the sidelines that could be worth hundreds of thousands or millions of dollars, but they’re using their funds either in their business funds or their personal funds to become a private lender to beef up their retirement income, okay.

I don’t think about banks, hard money lenders or what we call institutional private lenders. You’ve probably heard of companies like Lending One, Lending Home, Finance of America, Connected Investors, Lemo One, right? Arch Capital. These are all what I call institutional private lenders. They position themselves as private lenders, but really they’re hard money lenders, okay. And they require points, fees, interest, underwriting fees. They require monthly payments. They do rehabs based on a rehab draw schedule. And there’s lots of different problems with the way that they lend that makes it not as flexible, not as conducive for a real estate investor to make money. It’s a cramp on cashflow.

And so let’s talk about some of the problems with some of these lending programs and the reason why true private money is really ultimately your very best opportunity, your best options. So let’s talk about conventional banks. Conventional banks like quicken loans and Wells Fargo, and you know, anybody that underwrites and originates for Fannie Mae, Freddie Mac, HUD, VA, USDA, they’re all great. The advantage to that is that they’re typically able to give you the very best interest rate, you know, maybe four and a half percent, five, five and a half, 6% interest even on investment property.

And really that’s the only advantage if you think about it, because the disadvantages are numerous. There’s tons and tons and tons of disadvantages to using your credit and using bank loans for real estate. So first of all, disadvantaged number one is that you have to have a good credit score, right? You have to have at least about 620, 640 credit score. Number two, you’ve got to put at least 20% down. Number three, you cannot have a property that needs any repairs, okay?

If it has any repairs at all, forget it. They’re not going to want to fund it. A number four, if the property’s vacant longterm, they’re maybe not going to want to fund it because it’s vacant. They want to see somebody living in it. Also, there’s a very lengthy closing process, usually for investment properties, at least 45 to 60 days, if not longer. And other disadvantages that there’s a maximum number of loans that you can have if your bank is originating for Freddie Mac, you’re only allowed to have four loans on your credit, right?

Well, nobody’s getting rich owning four rental properties. Even Fannie Mae was going to let you have up to 10 but again, nobody’s going to get super wealthy owning 10 single family rental properties. Okay, that’s great. If you don’t own any rental properties, maybe owning one rental property is like a big step, a big leap for you, but I’ve owned 10 or more. It’s just not that big of a deal, okay. It’s just not that big of a deal and you’re going to need more funding than that. And so because the banks want you to use your credit and they want you use your income, the next thing that they’re going to do, the next disadvantages is that they’re going to want to underwrite you based on what’s called your debt to income ratio. So let’s just say you make $20,000 a month from your job. You’re in sales, you’re, you know, you’re in IT you do whatever. You make $20,000 a month, you make a quarter million dollars a year.

They’re going to look at that and say, okay, well your debt to income ratio needs to be about 40% so they’re going to say, well, out of all the debt you have your student loans, your car payments, your house payments, all the different loans and things that you have can only be up to about 40% to 45%. And so 40% of $20,000 is $8,000 grand a month. All right, well I know a lot of people that between their debt, their first mortgage and the two cars that they have, they’re already spending $3,000 or $4,000 a month on their car payments, their student loans and their house payment. So that eats up, if you make $20,000 a month, you’ve got $8,000 that you can basically finance or maybe $9,000 that you can finance per month. You’ve already eaten up $4,000 grand with some of your own personal bills.

So you’ve only got about $4,000 or $5,000 left that you can finance with additional mortgages, right? So that’s called debt to income. And right now Fannie Mae and Freddie Mac, they’re underwriting at about 40% to 45% and so you’re very limited. The closing process is long, they don’t fund deals that need repairs, which often those are the best deals to get. So your income or your credit doesn’t satisfy the bank. And it’s a very common problem when you’re financing high priced properties or lake front properties are apartment buildings. You know, and you’ve got this salary job and it provides a certain amount of income, but you’re using that income, you’re using that credit. You can only buy a certain number of properties. So eventually you’re stuck. The second thing that many people have said as well, I’m just going to use a Fannie Mae, a home path renovation loan, okay.

Or I’m going to use an FHA 203k loan. Well, again, those are loan programs only if you’re buying a property to move into it, you buy it, you rehab it, you stay there, you move into it. So they’re providing you the purchase and rehab funding, but only if you’re an owner occupant and you’re moving in all right. Now let’s talk about wholesaling. Many of you may be wholesaling properties for quick cash. Well, you know my number that I’ve always talked about, like if I was going to make a $15,000 profit or more on a wholesale deal, I wanted to protect that from the seller and the buyer and I did not want the seller or the buyer to see how much money I was making.

If it was $15,000 and under, then I was okay with them, you know, doing what’s called an assignment closing an assignment contract and them seeing that, you know, I bought the property and they’re seeing that I’m making $5,000 grand, $10,000 grand, $12,000 grand, but if I’m making $15,000 grand or more, I don’t want the seller to the buyer to get pissed off that I’m making over $15,000, $20,000, $25,000, $30,000 I’ve made as much as $80,000 on a wholesale fee before, and I want to protect that, so I’m going to need private money in order to buy the property, which is the first closing I’m going to own that property could be for a day, could be a week for a month, then I’m going to resell it.

I’m going to wholesale it to the next buyer. And that way I’ve taken title to it. Now there’s two sets of closing costs, but that’s minimal, okay. But I need private money to do that. So if you’re wholesaling and you have a big wholesale fee that you’re going to make, you’re going to want to protect that by actually closing on the property, getting private money, and then selling the house. And so even if you’re a wholesaler, you’ve got to have some private capital available for your big wholesale deals, apartment wholesale deals, commercial wholesale deals. Because dough for a day is fine, but only when you see that you’re doing it and closing it on the same day. A lot of transactional funders that are out there are only going to fund deals if it’s literally for a day where the closing from the seller to you, we call that the A to B closing is happening in one day and then the B to C closing from you to your end buyer happens in the same day.

All of those two transactions happen in the same exact time. Most funders, transactional funders will fund those deals, but only if they happen in the same day. If you’re holding the property for even three days, seven days, two weeks or longer, they don’t want to fund that stuff for you at all, okay. So wholesale flips are fantastic, but they’re mostly done with cash buyers. If you’re making less than $15,000 bucks, now what about hard money, right? You see the problem with hard money is, hard money lenders typically charge three to five points and 13% to 15% interest and they want you to put down at least 15% to 20% of the deal. It’s called loan to cost. So if you’re all in for $200,000 your purchases, let’s say $150,000 you rehab is $50,000 you’re all in for $200,000 and your after repaired value is $300,000 well, your cost is the $200,000 that’s your loan to cost.

They’re going to want 80% 85% loan to cost. Well, if you’re at 80% loan to cost or 90% loan to cost, you’ve now got to bring in $40,000 or 90% loan to cost is, you know, $180,000 you got to bring in $20,000 to closing. Then for the privilege of using the money, you got to pay three to five points. That’s 3% to 5%. So 5% on a $200,000 deal is $10,000 grand in origination points, okay? Now if I’m a lender, I love that, but if I’m a borrower, I hate it. It sucks right now they’re also going to charge, you know, 13% 15% interest and they’re going to want a monthly interest only payments. So you’re getting whacked, you’re having to use your personal funds, it cripples your cashflow, you’re getting crushed with fees. And ultimately you can only own a certain number of properties at one time, because it’s all you can finance.

Also with hard money lenders, you’ve got to have the entire loan paid back in 12 months or less, okay? Now what if your deal doesn’t sell? What if the property’s not going to work, right? What if you want to sell it on rent to own? Well, that hard money lender wants pay back in 12 months or less no matter what. So you can’t owner finance the property, you can’t lease option the property, you can’t rent it out. And we already talked about the points in the fees, right? They’re charging two four, six points per 2%, 4%, 6% upfront. It’s very, very, very expensive. You’ve also got to have good credit, okay. Guys ask me how I know it’s because I am a hard money lender. I am an institutional private lender. I’ve made over 400 of these private lender loans so I know exactly how they work and I’m just telling you because I love to lend.

I love to lend us money out. We get a huge return on our money, but I would much rather that real estate investors have true private money, okay? From a private lender that will fund a 100% of the deal with no points and all the interest deferred to the end, right? Also with hard money lenders, you’ve got to have cash for renovations, right? Even if they make a loan for $200,000 $50,000 of it’s rehab, that $50,000 you’re not going to get access to that $50,000 you’ve got to spend $20,000 , $30,000 thousand of your own money and then get reimbursed through a rehab draw or a construction draw, and because your rehab funds are stuck in escrow, your stuck forking out all that money on your own, $10,000 in fees, 13% to 15% interest, and you still have to put out all of your own money right?

Now let’s talk about owner financing for a minute, right? Owner financing. Well, a lot of people say, well, I’m just going to owner finance properties. Well, let me tell you, I’ve done that. I’ve owner finance properties before and 95% of the sellers that I meet are not interested in owner financing. They don’t want to take their equity, their cash, their capital that they’re about to cash out from a deal and then essentially they lend it to you to buy their property through an owner finance or a seller finance deal, okay. They don’t want that. And if they do offer financing, what the quote unquote gurus will tell you is that, well, you know, you just have to pay more. You have to give them full price. Well, shit, if I’m paying somebody full price for a real estate deal, I’m not really getting a deal, am I? So why would I pay full price for a property just to get the owner financing in place?

Like that makes no sense. Why wouldn’t I rather just have private money in order to pay lower, closing cash, close in two weeks at about 65 to 70 cents on the dollar and be able to focus on getting the money instead of trying to convince, you know, 95 people out of a hundred are not going to want to do an owner finance deal. Also, listen, you can’t do REO’s with owner financing. Banks do not do owner financing, okay. And you lose out on a lot of bargain properties because it’s very rare that I’ve seen somebody sell a property cheap and carry back owner financing on that same property. They’ll sell the property cheap if you can close fast, if you can give them all their cash. So what you could do is close quickly, pay all cash, and then talk to the seller afterwards about becoming a private lender to you on a future deal, okay.

So owner financing doesn’t really work, you know, 95% of sellers don’t want to bother with that. And so, you know, banks don’t work. Fannie and Freddie doesn’t work. Hard money lenders don’t work. Institutional private money doesn’t work. Institutional, private money, like I said, it’s just a disguise. It’s really hard money. They call it, oh, we’re a private lender. Yeah, but you charge two to four to six points. You charge 12%, 13%, 15% interest and I required a monthly payment and I got to put my escrow funds for Rehab in an escrow account. You’re not a private lender, okay, your hard money lender. Let’s be clear. And so without private lenders, you can’t get, you know, a verifiable proof of funds. You can’t posture up that you have all cash. You can’t close in two weeks, okay. And if the sellers and the realtors and the asset managers are not going to take you seriously, you are dead in the water.

But honestly, most of all, what I’ve seen from a lot of investors is when they don’t have private money, they’re scared, they’re scared, they’re scared to make offers they’re scared. Oh my God, what if I get a property under contract? What if I actually, you know what, if I win the bid, what do I do then? I don’t have any money. So they’re not making offers on auction properties. They’re not making offers on Fannie and Freddie. They’re not making offers on REO’s, they’re not making offers direct to seller because they’re scared shitless that they will get the offer accepted and they’re not sure where the funding or the capital is going to come from. And so, you know, the bottom line is, at the end of the day, you walk away when you don’t have private money, you end up seeing a bunch of amazing deals and then having to let them go.

You walk away from post-sale deals, rehab deals, rental deals, commercial deals, apartment deals, multifamily. You walk away from all of it because you’re just not sure where the funding is going to come from. And so for me, when I look at a real estate investors business, they basically need deals. They need money. And then if they’re wholesaling, they also need buyers. I start with funding. I start with funding because look, if I look back at my investing career and I look at all the hundreds and hundreds of properties that I wholesaled and rehabbed, I look back and the only mistake I made is that I didn’t keep every single one of them. If I’ve kept every single one of them, I mean sure, like back then I couldn’t keep every single one of them because I needed the money, right? But if I kept every single one of them, I would have a massive portfolio of over 700 rental properties, you know, most of which would be paid off right now.

And so that’s one of my deep regrets in real estate. And also one of the things I want to pass along to you to make sure that as soon as you can buy the properties and keep them buy the properties and keep them, keep the cashflow, keep the equity, keep the profit, keep the appreciation, keep the depreciation. And the only way you can do that is with funding. Now the beautiful thing about it is if let’s say you raise a half a million dollars, let’s say $250,000, well you can use that money. You can buy, rehab, rent, refi, pay off the private lender, and then go do another deal. Buy, rehab, rent, refi, pay off the private lender, go do another deal. So you don’t need to raise $35 million like I have, okay? You don’t need to do that.

If you started with a couple of hundred thousand dollars from friends and family and people that you know, like, and trust, you’re going to be in a situation where you’re giving them an amazing return on their money. And also at the same time, you’re in a situation where you’re creating amazing legacy wealth for you and your family, okay? So those are all the different reasons why banks and hard money lenders and institutes of private lenders don’t work. And why I’m not a fan of those when I’m a borrower. Now, look, I run a real estate private equity fund. We make private lender and hard money loans. So as a lender, I love it because we get amazing return on our capital.

But when I’m a borrower not as fun, definitely not as fun, okay. So look, those are the advantages and disadvantages of private institutional, private money, hard money banks, 203k, Fannie Mae home path renovation loans. And now that you know that those are really not options, the question becomes is how can we get private capital? How can we recruit more private money? How can we get funding and get freedom by having the private money? And I’ll talk to you about that in part number three. Coming up real soon.

You’ve been listening to Josh Cantwell and the Accelerated Investor Podcast. Leave a comment on our iTunes channel and let us know what you want to learn next, or who you’d like Josh to interview. While you’re there, give us some five star rating and make sure to subscribe so you can be the first to hear new episodes. Follow Josh Cantwell and his companies, the Strategic Real Estate Coach and Freeland Ventures on all social media platforms now and stay up to date on new training and investment opportunities to start your journey toward the lifestyle you’ve always dreamed of. Apply for coaching at JoshCantwellCoaching.com.

When it comes to financing your real estate investment properties, the “comfortable” route is to find a conventional bank, hard money lender, or other institutional lender.

But, when it comes down to it, financing from private lenders will almost always be your best option. Not only does private money usually allow you to make the biggest profit on a deal, but it also gives you flexibility with what you’d like to do with the property.

In Part 2 of the “Funding Equals Freedom” series, Josh explores the disadvantages of institutionalized lending options, and explains why owner-financing is also not a great idea (95% of the time).

Plus, Josh shares why, as a borrower, private money will almost always give you the best results… and lead you to financial freedom.

So, if you’ve been weighing your financing options, wondering which route is best, this podcast is for you.

While traditional funding might seem like the easy route to take, it’s often not the fastest, most flexible, and most profit-friendly way to purchase your investment properties. Why? Tune in to find out.

What’s Inside:

  • Why true private money will almost always be your best option
  • Details on how traditional bank loans work for investors
  • The disadvantages of using bank loans for your investment properties and wholesale deals
  • The problems with hard money lenders
  • Why private money is better for rehab properties than a renovation loan
  • The disadvantages of owner-financing

Mentioned in this episode​

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