Since I began investing in real estate, I have had to overcome many prejudices I held about how it is done. In retrospect, every single one of these prejudices was based on my own ignorance. It is easy to dismiss things I don’t understand as “that can’t be” or “that has to be illegal.” Over time, it became clear to me that, as in any other business, no investment company can survive for the long haul unless it is (1) bringing value to its customers and (2) conducting business within the bounds of the law.
Among the many paradigm shifts, the one that I finally overcame last month was the following statement: “You don’t need your own money to make money investing in real estate.”
First, it took several years before I would entertain the idea that this was even remotely possible. Then came the huge losses in our rental revenues due to the economic downturn. Our obligation to keep making monthly mortgage payments remains intact whether or not the tenants pay their rent to us. For a while, we were pouring our retirement funds into our commitments. Soon, it became obvious to us that if we kept bleeding cash at that pace, we would end up having to file for a bankruptcy. At that moment, I realized that I had no choice but to seriously look into what other investors were saying all along. The quickest way to improve cash flow was to learn how to wholesale real-estate properties. We began doing everything we were taught by those who were already making money wholesaling. Soon, calls began coming in from those who wanted to sell their properties.
This particular deal involved an out-of-state owner who, upon the death of his uncle, inherited the property in Michigan a few years ago. He had been renting it out to the next-door lady’s adult son and his friends. Making a long story short, not only did the tenants not pay a penny in rent for an entire year but destroyed the place. Even worse, the owner was receiving notices from the city, indicating that the yard needed to be properly maintained – or else. Not only was the yard a mess, the house itself was in such condition that it was hard to believe that humans actually lived there. The other side of the coin is that, to those of us who are looking to buy houses with huge discounts from a motivated seller, this was an ideal situation. Even better, it also came with two additional buildable lots in a good school district.
Over a weekend, the owner drove an entire day from his state, with a lawn mower, to take care of the yard. That is when the distressed owner and I met. We agreed on a purchase price. In this particular case, I also agreed to cover the closing costs so that the owner could walk away with an agreed-upon price, without any commission or other expenses deducted from it. He went back to his state, relieved with the knowledge that the property was about to be disposed of with our support at a price that was acceptable to him.
In terms of the end buyer, because of the extra buildable lots, we targeted local builders who were actually pulling permits in the area. Soon, we found a buyer with ready cash.
For this deal, we did what is known in the industry as a back-to-back closing. In other words, we bought the property by closing with the seller first (we call this part the A-to-B transaction); immediately thereafter, on the same day, we sold the property to the end buyer (the B-to-C transaction).
For the A-to-B transaction, we needed cash. This is where an opportunity exists for cash investors who are looking to make money by loaning the money for just one day. The transactional funding is made available to the borrower when she has done all of the homework required by the cash investor. Proof of every single piece of homework is provided by the title company to the cash investor. So, there is little, if any, risk for the cash investor. How brilliant is that? I don’t mind becoming one of those cash investors when we have excess cash!
As you can see, there are investors who understand real-estate deals, who are always looking to make money and, therefore, are more than willing to provide you with transactional funding.
The moral of the story is that when you are able to structure deals in a way that makes people want to invest with you, the money becomes a non-issue. Once you learn the how, the sky is the limit in your ability to generate revenues. What the experienced investors say is true: “You don’t need your own money to make money investing in real estate.”
