Do you know why this 6 Stages of Investing series is so completely awesome?
Not only is it chock-full of profound, game-changing, life-improving knowledge, but when it’s all said and done… when we finally reach the last part of Stage 6, you’re going to be beyond prepared for your investing future and armed with confidence to conquer challenges along the way.
And that, my friends, is simply amazing. Hey investors, Cody here, continuing my epic series…
It all started with Stage 1 where you learned how to best set up your business. If you need to, go back and start from the beginning, there’s loads of valuable REI info leading up to this point.
When we last rendezvoused, we explored the concept of transactional engineering, and we differentiated between hard and soft money.
Now, we’ve moved on (together) to the topic of financing. And the great news is… you’ve got options.
Bridging the Gap between Transactions
We talked about soft and hard money lenders (as I mentioned), but what about transactional lending? It’s also known as “one-day dough,” and here’s why…
Transactional lending is basically short-term financing for specific, niche types of flips. Let’s say you lock a property under contract, open escrow, find a cash buyer who’s willing to pay more, and you get THEM into escrow. But what if you can’t use their money? Here’s where the transactional loan steps up to the plate.
You can insert the transactional lender in the middle, and that lender will fund your deal 100%. And the beauty here is that the lender won’t ask for money down because they know you’ve got a back-end buyer. Both your butts are covered.
So think of transactional loans as the bridge between two transactions. You’ll see this scenario a lot in REOs and short sales.
Conventional Financing, One Tough Cookie
It’s good to know they’re out there, and they have their place, but conventional loans usually require 20% down, which is tough for investors, especially rookies and entrepreneurs with little to no cash in their pockets.
The conventional loan isn’t made or ensured by a government entity (non-GSE), and with these types of loans, investors are held personally liable. For most of us, personal liability is a phrase that makes us squirm, cringe and maybe even throw up in our mouths a bit. Just saying…
So while it is an option worth mentioning, there are better financing options out there. You just have to think creatively…
Creative Deal Structuring
With any property, there are typically two players in the investment game:
- The mortgage or trust deed (which shows who owns the house)
- The bank who owns the note
But did you know that you can actually separate the two? Thanks to a process called Subject-to Transaction or “Sub 2,” you can control a piece of another person’s real estate by getting the deed to the property while the seller maintains owner financing (the seller essentially becomes the bank).
Remember that your seller has to be willing to participate (obvi), and you should only enter into this type of transaction if your loan terms are solid. Your ROI (return on investment) should be pretty darn sexy if you go the Sub-2 route.
And who doesn’t like sexy?
So there you have it. Hopefully you’ve got a good handle on your financing options and when to use them. This is just another piece of the puzzle that we’ve connected together, and I’m super excited to say there’s still more awesome content to come!
Check back for our next installment on creating deals legally and ethically. This is kind of an important one (duh), so be sure you catch it soon.
Until next time… stay classy… and stay sexy.
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