How We Creatively Funded A Recent Deal

How do seasoned real estate investors creatively fund their deals without going to a bank?  To show you one way, let’s look at a deal that Kim and I recently got funded using a private-money lender.

This deal began when Kim and I were high bidders at the December 3, 2013 property tax auction in Cartersville, Georgia.  We bought the tax deed on 50 Akin Drive for $2,800.  The purchase money came from our checking account and was used to pay up the property’s back taxes for tax years 2010, 2011, 2012 and 2013.  By the way, despite what the TV infomercial claims about buying tax deeds, as the high bidders, we only owned the tax deed, not the property! 

Over the next twelve months, either the property owners (who had abandoned the property) or their mortgage company had the right to buy back the property’s tax deed for our $2,800 purchase price, plus pay us a fee of 20% interest.

Because neither the property owner, nor their mortgage company, redeemed the tax deed during the one-year redemption window, we ran a notice in the legal section of the newspaper and foreclosed their right to redeem. 

With that, we were the new owners of 50 Akin Drive.  Lucky us, right?  Not hardly.  What we owned was a home that needed work…a LOT of work!  Kim, who handles our rehabs, estimated that repairs would cost $30,000.  There was only one small problem.  We were exactly $30,000 light of having the $30,000 we needed to do this rehab.

I sent a letter to a number of the private-money lenders with whom we’ve worked. 

Basically the letter said that we needed to borrow $30,000 to rehab an investment property.  In return, we’d give a first-position mortgage secured by the property.

Ralph and Jeanette asked to meet.  They agreed to loan us the needed $30,000 if we agreed to the following terms: Ten years, at 4.97% compounding interest, with principal and interest payments of $400 per month.

Our exit strategy, after rehabbing the home, is to sell this home with owner financing.  Once sold, we expect to receive monthly payments of $615 a month for thirty years.  This will give us a monthly cash flow of $215 for the first ten years, then $615 for the next twenty years.  Because this will be a sale and not a rental, there won’t be any landlording headaches.

If you’re wondering whether this is a good investment, let’s do the math: $215 x 12 months x 10 years = $25,800.  Then $615 x 12 months x 20 years = $147,600.  Finally $25,800 + $147,600 = $173,400.  Is having $2,800 in a deal that will produce a $173,400 net profit a good deal in your book?  (What if you had 10 of these deals in your retirement portfolio?)

Here’s an important question: Why did Jeanette and Ralph agree to loan Kim and me their hard-earned money?  Because we’d pay them 4.97% interest, and their bank was only paying them 0.3% interest.  When it comes to money, isn’t more better than less? 

More importantly, and I learned this from Pete Fortunato, the foundation of any deal is SECURITY!  In this case, Ralph and Jeanette had to feel secure that their loan would be paid back as promised, and if it wasn’t, they’d be able to easily foreclose on the loan’s collateral (50 Akin Drive) to recover their investment.  In addition, the folks who buy the property must feel secure that their $615 per month is going toward a home that’s worth the money. Finally, Kim and I must feel secure that this will be a profitable deal that’s worth the effort and risk.  Oh, and what happens if any of the three parties – the lenders, buyers or dealmakers – don’t feel secure?  Simple: this deal never happens!

I’ve got to add, there’s security and then there’s S-E-C-U-R-I-T-Y.  Jeanette smiled when she said, “Bill, I’ve only shot a gun one time…but I have a real talent with a baseball bat!”  Batter up!