Lenders Wanted, Or where to get the money?

I am always looking for people who will lend me money on one of my properties. I give them a first Lien on the real estate and pay the lender 7% or 8% interest. 8% for amounts over $40,000 with a commitment of five years or longer. Payments can be monthly, quarterly, annually or any way we can agree to.

I borrow no more then 60% of the value of the property based on comps, or cash flow at a 10% cap rate. This is to protect the lender as well as assure that I have good positive cash flow. The biggest mistake I see real estate investors make is to borrow to much money, leaving them with insufficient positive cash flows. I want to be able to stand a 20% vacancy rates and still pay my lenders. (I have never had a vacancy over 8% a year but you never know). The other reasons to keep the borrowing percent to value low is to give you spendable income. that will allow you more money to invest from incoming rents, to allow money to maintain your properties thus keeping the values up, and because you will sleep better knowing you can pay the bills.

So how does this work:

I buy a house that needs re-habing, I fix it up and rent it out. Say I buy a house for $60,000 that would be worth $110,000 fixed up and updated. I spend $20,000 to re-habing the place.

I rent it for $1,100 a month. Wth a re-sale price of $110,000 I would borrow up to 60% of the $110K or $66,000 That would give me a payment of $484.00 a month, plus taxes and insurance of say $300.00 a month. That would leave me a positive cash flow of $316.00 a month for my efforts. The $66,000 I borrow should net me $65,000 after loan closing cost to use to buy another house with.

On the above example the private lender gets 8% interest on their money (fifteen times the current bank CD rate). I have $15,000 of my money in the deal, earning me $3,700.00 a year. That is a 24% return on my money assuming 100% occupancy. Even if I am vacant one month and have $600 in repairs I still have $2,000 left and a 14% return cash on cash.

So why do I do this?

Not for the $300 a month, but rather for many times the $300 a month coming in. Multiply that by 10, or 20 or 50. Whats enough money coming in to keep you smiling?

My goal is 100 units, or front doors. With that kind of money I can hire enough help that all I have to do is oversee the staff and search out new opportunities. And that is just from the cash flow.

Where is the rest of the money?

Real estate has historicaly gone up in value over time, (appreciation) they will do so again. Rents increase over time (inflation) thus increasing your free cash flow. The government likes real estate so you can take deprecation aginest your taxes (there are some limitaions on this). Because you fixed up property, they are worth more then you spent (sweat equity). If you never sell the properties you never pay any taxes on the sweat equity or appreciation. And if you do ever pay the taxes on your gains it is at the long term capital gains rate. Now how good is that?

To recap:

You are paying your lenders a lot more then the banks are paying them. You are improving neighbor hoods, You are recycling properties. You are giving people a better place to live. You are helping the economy. You are getting richer. You are helping to create jobs. And, you get to play monopoly with real houses. How cool is that?