Financing Buy and Hold Investment

Some Thoughts from Andrew Sy rios

Buying real estate ain’t free unfortunately. Indeed, I like to say that if you’re not cash poor, you’re not a real estate investor, at least in the beginning. Buy and hold real estate offers a great way to gain wealth, but most that wealth will be tied up in equity. And to get to that equity, you’ll need to find a way to finance your acquisitions.

Fortunately, there are a lot of great ways for a new investor to finance holds. The best methods, in my humble opinion, are listed below:

Save and Hold

If you have a decent job and want to invest in real estate on the side, the “save and hold” method is for you. This requires living below your means and saving money of course, which really is a prerequisite for any sort of investing.

Having a job is a major advantage because it makes it much easier to get bank loans. Banks just love easy-to-digest borrowers with W2 income. Unfortunately, there are downsides. It’s much more challenging to find good deals when you’re working a 9 to 5. And of course, you are stuck with a job, which is what many people who get into real estate want to get out of. Save and hold is a fairly passive approach to real estate investment, but it can help secure a great retirement. It’s also a good way to build a foundation so you can later leave your job to go full time into real estate investment.

Flip and Hold

Flip and hold is probably the lowest risk method to buy and hold as a full-time real estate investor. With this strategy, you simply use the profit from the first flip to live and the profit from the second flip for the down payment on a property to hold. Then re- peat. (Or something fairly close to that, at least.) Eventually, when you’ve built up some equity and can refinance cash out from your existing portfolio, you can flip less and less and hold more and more.

FHA Loans

In my judgement, FHA loans are the best way for a completely new investor to start. You need to a job to get one and you’ll also need to live in the property as well. That being said, FHA will finance 96.5 percent of the purchase price at a very low interest. And the best part is that you can finance up to a fourplex. So, what I recommend is to purchase a fourplex, live in one unit and rent out the other three. After a year, you can leave as well. (Although you can only have one FHA loan at a time, if you bought right, you can refinance the property with a traditional bank and buy another property with a new FHA loan.) You can also get FHA loans for rehab properties under their 203K program.

Creative Financing

Motivated sellers will often give you a steep discount to buy a property, but they may also be willing to provide you with a creative financing solution that will allow you to buy the property for little or nothing down.

The simplest version of this is seller financing. If the seller has some equity, they can loan you that money back to buy their house. Or they can loan you a second mortgage behind a bank loan to cover the down payment.

Another possibility is to buy the property “subject to existing financing.” With a “subject to,” the deed is transferred to you, but the loan stays in the name of the borrower. It will take a motivated seller and plenty rapport to convince a seller to do these types of deals, but they happen all of time. (It should be noted, however, that with subject to’s a bank has the right to call the loan due, but this rarely happens.)

Private Lenders

This is our favorite method. Banks will only loan 75 to 80 percent of the purchase price and hard money loans are generally too expensive for buy and hold investments. Fortunately, those aren’t the only lending options out there. Private lenders, usually someone you know or have networked with, can lend larger amounts than banks and at better rates than hard money lenders. We usually get loans with between 8 and 9 percent interest only with no points.

In many markets, properties won’t cash flow at 9 percent interest, but there are decent areas in Kansas City which will. Furthermore, private lenders are great for the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) where you buy with a private loan up front and then refinance with a bank at appraised value (this all assumes you bought for a discount, which you should be doing) to pay off the private lender and basically acquire a property for close to nothing.

With regards to finding private lenders, it is impossible to know who has money just by looking at them. So, write an elevator pitch (a one paragraph explanation of your business and what you offer) and say it to people often. Go to networking events and rub shoulders. Write down a list of people you think might have money and give them a call. Sometimes you have to hustle in this business.

If someone shows interest, invite them to lunch. Make a business plan and show them some case studies if you’ve done any deals before. We’ve found once people trust you, they are quite willing to swap the pathetic returns they’re making in a CD or the volatile stock market for a guaranteed return.

Partners

Another way to approach investing is to find one person with a lot of money to partner with. They bring the money, you bring the work and split the equity 50/50 or something along those line. This is one of the most effective ways to buy and hold, although it will usually take a track record in real estate to convince such a person to partner with you.

Whichever method you decide to use, buy and hold real estate can grow your wealth exponentially. So don’t sit back and wait. Get in the game!

Andrew Syrios is a local Kansas City Real Estate Investor who along with his father and brother own and manage Stewardship Properties. Andrew will be our guest speaker at the March 12th MAREI meeting and explaining how they have built wealth with buy and hold by Buying, Renovating, Renting, Refinancing and Repeating—BRRRR. Then on Saturday the 16th he and his brother Philip will be teaching their buy and hold management strategies. Get the details on the calendar at www.MAREI.org.