When I do seminars all over the country this is one of the top 3 topics each and every time without fail. I don’t care if the group is a bunch of beginning investors just starting out with limited cash or a group of millionaire business people. The people just starting out want to know how to access capital without all the red tape and ridiculous demands made by a traditional bank. The millionaires want to know how to loan out their own capital safely and at high rates of return. The truth is the banker you are trying to obtain money from has no idea how investment real estate or most businesses really work. You would be surprised to learn how little income most bankers actually make performing their jobs. Most people in these positions really care more about the prestige, titles, and their standing in the community than their actual incomes. It can be very frustrating dealing with a traditional banker when you are trying to achieve nontraditional goals via nontraditional methods. This is very similar to the frustration if you spent 30 days trying to put your round peg through the square hole. Most bankers are NOT business people and are governed by an old style economy way of thinking. If you want to make your entrepreneurial endeavors as easy as possible, you will need to start developing private sources of funds. Contrary to popular belief, banks don’t hold a monopoly on financing projects. There are many other sources to fund properties and projects. Just a few alternatives are:
- Finance companies
- Insurance companies
- Government entities (national, state, and local)
- Sellers of the properties and businesses (loaning you all or some of their equity by taking back a note and payments over a period of time)
- Venture capital firms
- Online financing options that act as a type of clearing house for all types of lenders
There is also a huge pool of billions of dollars that already exists of individuals and hedge funds that loan money to fund all sorts of projects. In our examples, we are going to talk about private individuals loaning money to fund our projects. There are people all over the country who are making private loans right now and you want to start knowing how and where to find these people.
Why Not the Banks? Banks require a huge amount of documentation and proof of everything to fund deals. This is especially true now after the last financial and banking collapse ushered in an era of even more regulations and hoops to jump through to get deals financed. Now, even simple straight-forward deals require loads of paperwork and much of it redundant. Many banks are looking for reasons not to do the deals instead of why they should do the deals. When you are talking about buying properties in the 1-4 unit category, almost every bank or mortgage company loan will be underwritten to Fannie Mae standards (FNMA) which are basically controlled by the government. If you’re looking to do anything creative, but yet safe with a financing package, you’re out of luck.
Investors unfairly received much of the blame during the last banking crisis. The fact is that most of the bad loans and way out mortgage programs such as “120% financing” and the “negative amortization loans” were approved for regular homeowners and not for investors. Investors are mainly responsible for stabilizing the real estate markets when they were in free fall. Investors pumped in many billions of dollars of their money to buy in at reduced prices. They have since been responsible for taking much of the bulk inventory off of the market so prices had a chance to stabilize and even increase off of their lows. Even with all of this, investors are many times frowned upon by FNMA underwriting standards and it becomes more and more difficult to obtain financing, even on great, safe deals. If I had a deal on my desk now that I could buy for $100,000 and was worth $200,000, and only wanted to borrow $80,000 from the bank, does that sound like a high risk loan to you? The lender should verify the true value, repairs needed, a little credit (but more character), and obtain a title commitment. After that, they should be ready to close quickly. This is not the case when dealing with traditional banks and mortgage companies. They will want a never-ending list of documents from me to prove I am good for the money. So let’s just not deal with banks to make profitable deals.
Tune in next week when we post part two of using private money to fund your business and real estate ventures. Visit us at www.wealthwithoutstocks.com