Dennis AZ Homes

A Real Estate Investor’s Guide To Financing Investments

Getting a short-term loan quickly can be difficult for real estate investors and wholesalers, especially if a great potential deal is coming up soon. However, you don’t necessarily need to go with a sketchy loan or a high interest offer. Instead, you might be able to rely on transactional funding to finance real estate deals and other investment opportunities. But before you put all your eggs in one basket, let’s take a closer look at this process and break down whether it’ll be a good choice for your investment goals.

What is Transactional Funding?

Also called same-day funding or flash funding, transactional funding is a unique financial strategy in which investors take out very short-term loans to make purchases, then pay back those loans much more quickly than normal, oftentimes within the same day or week. They pay the loans back with profits made on the purchase. Through this alternative form of financing, investors, especially real estate wholesalers, can buy and sell target properties quickly without risking their capital. Because of their extremely short-term nature, these agreements are best used for real estate deals where a buyer will close on a deal and resell the same property (in a separate deal) for a profit within a few days at most.

How Does Transactional Funding Work?

There are several key agents in a transactional funding process:

A lender that provides the money for the transactional funding
An intermediate agent, like a real estate investor or real estate wholesaler
An initial seller, who sells the target property to the real estate investor
An end buyer, who buys the target property from the real estate investor once the investor gets the cash they need from the lender

In most cases, capital is available from hard money or private money lenders. Additionally, transactional funding is usually only possible when the intermediate agent (such as the real estate wholesaler) has a well-documented and established end buyer in place for the second deal. That’s because the second or end buyer needs to be ready to buy a real estate wholesaler’s property immediately after the investor buys their target property from the initial seller. In other words, this type of financing only works when all the players in such a transaction are ready to go and trustworthy.

You can use transactional funding for any real estate purchase and sale so long as the closing agent is willing to facilitate all the transactions and the lender agrees to the terms. In many cases, the lender will need important details made available to them to trust in the transaction. Note that transaction funding was available on a “pass-through” basis before the 2008 recession. This allowed an investor to sign a contract to buy an excellent deal for real estate at a low price, then sign a secondary contract promising to sell the property at a higher price for a profit. Then the investor could use the end buyer’s money to fund the initial transaction to kick off the entire process. However, new regulations now require the purchase of the target property and the selling of the property to be two separate transactions.

How Much Does Transactional Funding Cost?

It depends on the comfort levels of different lenders. Some lenders may be more comfortable with certain deals than others. Even with this variability, real estate investors should assume that lenders will charge between 2% and 12% of the total loan amount. For example, if you need a $100,000 loan, you may need to pay between $2000 and $12,000 to facilitate the transactional funding process.

Transactional Funding in Wholesaling

Transactional funding is often useful when trading wholesale properties. Investors can get the cash they need to get a deal from a seller and quickly resell the property they purchased for a profit in a separate, transaction. This funding method gives investors more versatility and can replace the assigning contracts method of real estate trading, which is sometimes not permitted depending on your area. Because of its benefits and speed, transactional funding is of great use to real estate wholesalers.

What Do You Need To Be Eligible?

Although eligibility requirements may vary from lender to lender, there are generally 3 things you need to be considered eligible:

A motivated seller
Proof that you represent a business entity, such as an LLC
An end-buyer who is ready to close the deal immediately.

Note that the title company must be able to send a written confirmation stating that the money is in their escrow account.

Is A Proof Of Funds (POF) Letter Provided By The Lender?

Yes, the lender will provide a proof of funds (POF) letter. This letter proves to your seller that you have the funds available to purchase the property. Your deal is more likely to move forward once you have a POF, representing official backing from a legitimate financial institution.

Are There Any Upfront Fees?

Borrowers are expected to pay an origination fee, which is the equivalent of a few percentage points of the loan amount. When it comes to wholesaling, borrowers don’t have to pay a down payment on top of an origination fee. Wholesaling is an investing modality that allows you to access capital with minimal costs.

Is There A Processing Fee?

Yes. Borrowers must pay a processing fee that is separate from the origination fee. The fee pays for an attorney who will review the documents and certify that the property and title meet any legal criteria required for it to close. The closing fee varies from lender to lender but expect to pay at least $1,000.

Transactional Funding in House Flipping

Not surprisingly, transactional funding is an important tool used by house flippers and rehabbers. Most notably, it increases optionality and the ability to secure more deals. Thanks largely to the speed at which transactional funding may be deployed, investors may gain access to deals they would have otherwise lost out on to the competition. In securing and deploying money faster than others, investors can make offers sooner than those seeking traditional financing. Through this transactional method, house flippers can get the funds they need to rapidly purchase a wholesale deal, then flip the house and sell it to an end buyer without rehabbing it or spending lots of money fixing it up.

Example Of Transactional Funding

Let’s walk through an example of transactional funding to help solidify the concept. Let’s say that you’re a wholesaler working with a buyer who wants to move to Arizona from Illinois. You identify a property that needs minor upgrades and negotiate a selling price of $300,000.

You put the property under contract such that the property will be sold from your seller to your buyer for $350,000. You then secure a transactional loan and coordinate closing dates. You also arrange for a contractor and their workers to make the necessary upgrades within the next two days.

You put $10,000 of your potential profit into contractor and lender fees. After closing, you walk away with a profit of $40,000, all without having to put in a dime of your own funds.

Pros & Cons Of Transactional Funding

Transactional funding is a proven strategy that has found its way into investors’ playbooks. The optionality and speed of implementation transactional funding awards investors are invaluable. That said, the method in which transactional funding grants those who use it access to capital isn’t without downsides. Taking on debt to secure an investment does come with inherent risk. As a result, investors need to weigh the pros and cons associated with transactional funding and decide for themselves if it’s worth pursuing.

Pros of Transactional Funding

The pros of using transactional funding include, but are not limited to:

Loans Cover The Entire Cost Of The Property: There’s minimal risk for real estate investors and wholesalers, as the loans provide 100% of the loan amount to purchase a property.
Straightforward Processing: The paperwork is straightforward, and most deals don’t require your credit score or income to be reported for approval.
Relatively Easy Qualifications: All you need is a proof of funds letter from the end buyer for your target real estate property.
Speed Of Implementation: Funds can be acquired extremely quickly, sometimes in a matter of hours.
Optionality: Transactional funding allows you to take advantage of “flash in the pan” real estate deals that don’t come around very often.
Accelerated Process: Most transactional lenders don’t require insurance, appraisals, or full title reports, which accelerates the process and may increase your profit margins.

Cons of Transactional Funding

The cons of using transactional funding include, but are not limited to:

Closing Costs: The funds from a transactional funding deal come with closing costs. Fees will usually be taken out of your profits at both deals’ closes.
Short-Term Loan Duration: Transactional funders usually offer short-term loans, so you must be prepared to settle with your end buyer very quickly after taking out your loan.
Payments Due Within Weeks: Transactional loans are often due within two weeks of being taken out or may even be due within 48 hours.
Deal Dependent On End Buyers: Any end buyers must qualify for financing for the deal to go through.

How to Qualify for Transactional Funding

While transactional funding can be effective, you’ll need to qualify for these deals to take advantage of them. Generally, you’ll need:

An end buyer contract that proves the end buyer’s funds are present to convince the transactional lenders that the deal can go through ASAP
Possibly a credit report and background checks for the borrower
Some due diligence for the property, like a desktop valuation or examining pictures from the interior and exterior of the property
Many lenders may also require a letter, which evaluates the borrower based on the “5 Cs of Credit”

Alternatives to Transactional Funding

Given the risk inherent with transactional funding, some real estate investors may wish to consider alternatives, including:

Hard Money Loans: Offered by private lenders, hard money loans offer short-term capital, which is backed by the subject property. Hard money loans typically come with lower interest rates than their private money counterparts, but approvals can be harder to come by for some investors.
Private Money Loans: Private money loans are not associated with an institution but rather private investors with access to capital of their own. Without an attachment to an institution, private money lenders are easier to qualify for and faster to act. However, private money lenders will ask for higher interest rates, upwards of 12% to 15%.
HELOCs: Otherwise known as home equity lines of credit, HELOCs allow investors to borrow against the equity in their own homes to finance subsequent real estate purchases.
Joint-Venture Capital: A joint venture, as its name suggests, is a convergence of two or more parties that seek to invest in a single property for profit. In addition to sharing risks, joint ventures will also usually share the acquisition costs.

Summary

All in all, transactional funding can be an excellent tool in your real estate investing repertoire, particularly if you stumble upon a great deal you want to jump on ASAP. But keep in mind that you will need a guarantee of an end buyer’s funds, plus their willingness to pay, to secure transactional funds from a suitable lender. Furthermore, you may be on the hook for paying back the loan faster than you anticipate, so make sure to close both transactions in a deal quickly.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com
Dennis Dahlberg Broker/RI/CEO

Equal Housing Opportunity. This is not a Good Faith Estimate and this is not a Guarantee to lend and should not be considered as such. Costs, rates, estimates and terms can only be determined after completion of a full application. Actual payments will vary based on your individual situation and current rates. APR for loans vary from 7.99 – 29.5% and is based on Credit Score, Down Payment, LTV, Income. Mortgage rates could change daily. To get more accurate and personalized results, please call 623 582 4444 to talk to one of our licensed mortgage experts. Terms and conditions of all loan programs are subject to change without notice. Level 4 Funding LLC, 22601 N 19th Ave Suite 112, Phoenix AZ 85027, 623-582-4444 NMLS 1018071 AZMB 0923961 This e-mail is for the exclusive use of the intended recipients, and may contain privileged and confidential information. If you are not an intended recipient, please notify the sender, delete the e-mail from your computer and do not copy or disclose it to anyone else. Your receipt of this message is not intended to waive any applicable privilege. Neither this e-mail nor any attachment’s establish a client relationship, constitute an electronic signature or provide consent to contract electronically, unless expressly so stated by Dennis Dahlberg RI/CEO, Level 4 Funding LLC, in the body of this e-mail or an attachment. To the extent this message includes any tax or legal advice this message is not intended or written by the sender to be used, and cannot be used, for legal or tax purposes or advice.

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.

6 Places Where You Can Raise Capital for Real Estate Investing and Make Moola

Raising capital for real estate can be a challenge for many new investors, but it is necessary for anyone looking to succeed in the industry. The key to learning how to raise capital for real estate is to focus on identifying what today’s lenders covet the most (and give it to them). If you succeed, there’s no reason you shouldn’t be able to raise the real estate investment capital you need for your next deal.

Other People’s Money (OPM) is what makes real estate investing possible for a considerable percentage of aspiring investors. Even the most successful real estate professionals and legendary investors almost exclusively use OPM to reduce liability and maximize returns. Daniel Chan from Marketplace Fairness suggests “It is important for investors to know how to raise capital in the real estate world because it gives them more options and opportunities to invest in the market. Even if an investor has their own money, knowing how to raise capital can help them get better deals and make more money in the long run”. As you can see, raising capital is critical for investors of every level.

However, both novice and seasoned real estate investors struggle to connect with potential private investors and close the deal. (Or even understanding how capital works with an alternative strategy such as tax lien investing.)

This is a shame, considering there is more real estate investment capital out there than ever before. Remember, private money lenders want to work with you just as much as you want to work with them. Private lending has never been so attractive or widely accepted, and the benefits for you and your lender are endless.

Raising real estate investment capital is about more than a simple message or conducting a presentation that resonates. It must be more than a pretty website, thousands of inorganic Facebook friends, glossy folders, and a nice suit.

What Is Investment Capital?

Investment capital is the money used to fund a given investment deal. This can include the costs of acquiring a property, initial renovations, and upfront costs. There are generally two types of investment capital: debt and equity. Debt refers to investment capital from hard money lenders, such as banks, and often requires interest payments. An advantage of using debt investment capital is that hard money lenders will not have a say in the company. However, many investors may find it difficult to secure capital with hard money lenders. This is where equity (and OPM come in).

Equity refers to money secured by selling ownership of a property or business. Private money lenders may invest in a company if they see the investment as potentially profitable. Using equity as a form of investment capital has different pros and cons to utilizing debts, so investors must consider both options. For entrepreneurs ready to put the work in, raising private money can offer the chance to pursue various investment opportunities and expand their portfolios.

Top Sources Of Private Money

Private money can be found all over the real estate industry, but it may not be easy to identify if you don’t know what to look for. Here are some of the top sources of private money to be aware of:

Business Partner: A common business arrangement is for one partner to manage the heavy lifting in terms of workload, while the other supplies the capital (called a silent partner)
Peer-to-Peer Lending: P2P lending is made possible through online lending platforms that partner you with other investors.
Crowdfunding: Real estate crowdfunding has become increasingly common over the last several years, and again allows you to utilize an online lending platform to finance investment deals.
Family, Friends, or Colleagues: Many private money deals are funded by sources close to the investor, such as a family member with extra capital.
Hard Money Lenders: It is also possible to finance a deal with an investor you haven’t worked with before. Ask around your network for trusted lenders to learn more.

What Are Money Partners?

Money partners are anyone you decide to work with to fund a given deal. When it comes to raising capital for real estate, money partners can be beneficial because they can enable investors without significant capital to get started. Money partners can finance a deal, provide advice, and even share a given investment risk depending on the arrangement at hand. Because of this, money partners are often highly sought after in the investment world. However, it is important to note that partnering with other investors is mutually beneficial. Business partners stand to benefit from the success of a good deal just as much as you do, something that is important to keep in mind as you get ready to approach potential lenders.

Money partners exist throughout the real estate industry, though it is important to approach each potential investment carefully. It is not uncommon for even the most seasoned real estate investors to fail to close a deal with private money lenders or money partners. To ensure this does not happen to you, research potential investors you are trying to work with and put in the time and effort to ensure you are prepared every step of the way. If you are interested in learning more about how to find private money lenders or money partners, read this guide.

Uses For Private Money

Those who want to raise capital for real estate most commonly use private money for refinancing a property or buying a new property. For example, suppose you purchased a property using a conventional mortgage but want to want to negotiate for a shorter repayment plan or lower interest rate. In that case, you can use a private money lender to help you refinance.

If you are interested in condos, single-family homes, multifamily homes, or apartments, private money can be used to purchase your new investment property. To get a private money loan for a new investment property, you will have to pitch the potential profitability of the property with reliable numbers and predictions. Raising capital for real estate using private money is typically easier for experienced investors as they have records of successful deals they have made.

How To Raise Capital For Real Estate

Private money lenders will often have their own set of rules and guidelines. While many will exercise similar practices, their borrowers’ criteria are different. I maintain, however, that there are several universal things private money lenders look for.

If borrowers can identify what it is their money partners want, it’s more likely that they will receive the loan. You see, lenders are in the business of making money, too. There are 6 P’s that you can remember when it comes to private money lenders. If you can give them the things I outline below, you could find yourself with the money needed to buy your next deal:

Protect their capital
Promise realistic returns
Prove your potential
Procure a great deal
Provide your track record
Promote relationship building

1. Protect Their Capital

The primary concern investors have is protecting what they’ve loaned out. If they lose that, they won’t be able to profit, which is the whole point. That’s why so many money partners have recently invested in low-yielding real estate-related products and ventures. When contemplating this factor, most look for collateral and how easy it will be to get their money back in the worst-case scenario. So be ready to answer these questions and have a plan B in your back pocket. It should go without saying, but the best way to work with a private money lender and raise the real estate investment capital you need for your next deal is to convince them that it’s worth their time.

2. Promise Realistic Returns

Where most real estate investors go wrong when trying to raise capital is promising huge returns. If you sound overconfident, your presentation will automatically appear to be a “high-risk investment” or “scam,” which is certainly not the message you want to send. You will have to be above average market rates – of course – but don’t project too high. The last thing you want to do is overpromise and under-deliver. Even if you think your goals are possible to achieve, start by underestimating and then deliver more later, which will create a sense of loyalty and reliability between you and your first line of money partners. If you tell them they will receive an ROI of 8 percent, and they actually make 14 percent after all is said and done, you can bet they’ll put you at the front of the line in their contact database and beg you to take their money for your next deal.

3. Prove Your Potential

On the other hand, you need to make your investment sound appealing. Savvy investors with bigger pockets and heavy-weight venture capital firms are, of course, intrigued by the promise of big wins. So, while keeping projections conservative, don’t be afraid to hint at the full upside potential – those big numbers you are hoping you’ll really hit.

4. Procure A Great Deal

Everyone wants a “deal.” There are two reasons for this. The first is that it is simply human nature. If someone thinks they are getting a good deal on a product, it automatically gives the impression of value. The second is that these individuals and money managers want to look smart and feel like they are making a sound investment. They all have someone they need to impress. It could be their boss, co-worker, spouse, competitor, or even themselves. Regardless of who, your potential money partner will want to be able to boast about how intelligent they were to discover this high-yielding or trendy investment before everyone else. Help them out.

5. Provide Your Track Record

Of course, most investors expect to see a proven track record. They want to know that you can deliver on your plans. If you don’t have direct experience in real estate investing, what other relevant experience do you have or who else can you partner with? Have your portfolio ready to go with your successes on top. You’ve got to have the numbers to prove yourself.

6. Promote Relationship Building

Surprisingly – or perhaps not so surprising – having a personal relationship between both investing parties trumps the rest of the qualifications. So how can you build more authentic relationships or find like-minded individuals – whom you might already know – that might want to work with you? This is one of the most important habits to acquire as a real estate investor. Try attending a local networking event to get your face out there. Building and maintaining relationships is necessary if you want to discover a potential money partner and achieve success.

5 Tips For Raising Private Real Estate Capital

The best advice for raising private capital in real estate will vary depending on who you ask. This is because over time, investors find the way of doing things that work best for their real estate businesses. However, this is not helpful to newbies. What I can say is that it takes time to develop a surefire system for raising private capital. In the meantime, —here are some tips to help you get started:

Use Your Own Money First: Before you start fundraising a new project, assess how much capital of your own you can rely on. Not only will this help you frame the budget for the project, but it will also lower the amount of cash you are paying interest on should you find a private lender. To increase your personal capital, consider redoing your monthly budget and reducing expenses for a while; you may even be eligible for a home equity loan.
Attention To Detail: The details included in your portfolio are going to make or break your pitch to private money lenders. Ensure you have an accurate purchase price, property value, rehab cost, and rental value wherever it applies to you. If this is your first investment deal, make sure the figures and estimates in your deal analyzer are as accurate as possible. Strong attention to detail could mean the difference between choosing a potential investment and securing enough financing.
Showcase Your Success: When you complete a successful real estate deal, don’t be modest! Share the good news with your network, website, and social media following. Investors can and should showcase their successes (or wins) as they come along. This can help establish your credibility over time in the real estate industry when done right.
Build Relationships: Networking is not as simple as exchanging business cards, and you shouldn’t want it to be. If you want to have a successful career in real estate, building relationships across the industry is critical. Keep up with your connections, celebrate their successes, and check-in from time to time. Building genuine relationships will help your career more than you can imagine.
Educate Others: Sometimes, you may encounter potential lenders who are mostly unaware of the intricacies of a real estate deal or the dynamics of private lending. That’s okay; it could be the perfect opportunity to educate someone else about what you do. As you build relationships with other real estate professionals, have conversations about lending and acquiring deals, share the resources you find helpful, and put people in contact with one another when fitting. This will help you build relationships (as I mentioned above) and potentially introduce investors to a mutually beneficial real estate aspect.

Raising Capital For Residential Vs. Commercial

When comparing residential and commercial deals, financing is going to look very different. Residential properties almost always cost less than commercial properties, and investors need to secure less funding overall. It can take a shorter amount of time to raise the capital necessary for a residential deal. Commercial deals, on the other hand, require much more capital but come with higher profit margins. For this reason, some investors may find it easier to secure commercial properties. Overall, it comes down to your network and preferred lenders. Raising capital for residential vs commercial properties requires an understanding of the different income projections.

Continue Learning How To Raise Capital For Real Estate

Raising capital for real estate has become one of the most discussed topics associated with real estate investing. If for nothing else, it’s the one concept anyone could stand to improve on, there’s never too much funding. As a result, there are volumes written on the subject of raising capital for real estate, and perhaps even more knowledgeable people talking about their own strategies just about anywhere someone is willing to listen. Truth be told, it’s not hard to find someone willing to offer their own opinion on raising capital for real estate investments; the hard part comes in distinguishing between those who are truly knowledgeable and those who are, for lack of a better word, ignorant.

It should go without saying, but incorrect information can be damaging to one’s career. Therefore, it’s important to gather information from trusted sources, not the least of which include:

Books: To this day, books represent one of the greatest ways to filter through the volumes of information made available to investors. However, the number of books one can find on raising capital for real estate can be staggering. Instead of sifting through everything, and risking learning from someone that may not know what they are talking about, save yourself some time and consult “The Real Estate Wholesaling Bible,” by my friend and business partner Than Merrill. As the name suggests, aspiring investors will learn how to wholesale real estate, but a large portion of the book deals with raising capital and funding. As a compliment, my own book, “The Real Estate Rehab Investing Bible,” will teach readers the importance of raising capital for real estate and the best ways of going about doing so.
Podcasts: Relatively new to their written counterparts, podcasts are not to be underestimated. Oftentimes free, these downloadable audio files are filled with information from today’s top minds in the real estate industry. Get Wealthfit, for example, is a compilation of podcasts by investors who have been exactly where many aspiring investors hope to be one day. Get Wealthfit covers everything from money management to marketing strategies and everything in between.
Blogs: Not unlike books, blogs offer knowledgeable individuals the ability to share their knowledge with the masses. Only, instead of releasing once every year or so, writers can publish blog content daily.

Summary

Raising capital for real estate doesn’t need to be nearly as hard as many make it out to be. For those learning how to raise capital for real estate, remember, working with money partners is as simple as doing two things: learning what it is they want the most and giving it to them. The investors can identify what today’s lenders are looking for that stand the best chance at getting the money they need for their next deal. That said, pay special considerations to the steps above, as they offer insight into what the majority of today’s lenders look for in a borrower. Only when you can give a lender what they want will your chances of receiving real estate investment capital increase dramatically.