Real estate investing is an extremely rewarding industry but does pose it’s challenges like any other business/industry. This blog is to share a little about my experiences on both sides of that fence.

Let me start with the challenges. I have experienced many pitfalls but that did not discourage me as the rewards and my passion outweighed those immensely. I have been investing in real estate since 2006. Buying my first investment property at the height of the market thus paying more than the property’s current value is now in 2020. With not having the education that I have now acquired and continue to do so contributed to the price I paid for that first piece of investment property. I use the term “investment” property as this is a rental unit that I still own today. Now although I purchased at the high end of the market in 2006 right before those now memorable years of 2007, 2008, & 2009 real estate as always is still a particularly good investment. Some investors look at immediate return on their investment. I have always looked at hold property as a long-term investment and now 14 years later from a value perspective this property is leveling out in value to what I purchased it for in 2006. Now keep in mind there has always been a positive cash flow and continued equity growth. This is one of several challenges I have faced in real estate investing. Let me share a few more. Having temporarily taken a step back from real estate investing in 2006 (luckily) I did not become more active again until 2014. Now I had grown my education in this industry and started investing in rehab properties or what is more commonly known as “flips”. Now the challenges increased but I was armed with newfound education. I will briefly list a few of those challenges. My first 2 rehabs in 2015 were somewhat smooth in comparison to what came in the later part of 2015. I purchased a 1909 farmhouse that had been vacant for approximately 15 years prior. Having great foresight, I could visualize what the finish property would look like in my mind and eagerly purchased the property from a wholesaler with anticipation of completing the project in 4-6 months. Man was I wrong. Also understand I had purchased another property in the same timeline. Well 18 months later on the “4-6 month” farmhouse and being funded through a HML (hard money lender) at 12% interest it was completed and on the market listed on the MLS (multiple listing service) just before Thanksgiving. Now I was a nervous wreck because it had been shared with me that this was a horrible time of the year to list a property, which I learned later was an opinion of those that really were not in tune with the market as they lead me to believe. But after no solid offers and now my listing coming up on Christmas and 30 days later, I was starting to believe those opinions. My listing agent and I put our heads together and decided we would remove the listing from MLS during the holiday weeks of Christmas and New Years and relist in the new year of 2017. We relisted with no price adjustment and immediately had multiple offers and my accepted offer had us to closing in early March with a $100k profit. The good and the bad. Now let me share with you the UGLY!! When you go into business the intent is to be profitable. At least at some point after starting. This was not the case in fact the $100k of profit that I just shared about, well that was lost in 2017. I joint ventured with two other investors on two projects and project managed a third one with another investor and project managed all three of these in addition to working full time in Corporate America. Well let me be the first say that I do not have anything on Superman and there is no BIG golden “S” on my chest. My ambitious thoughts of “I can handle this no problem” were quickly deflated and those three ventures ended up a loss to the amount of approximately $100k in anticipated profit for me. Now at this point most would say I am out of here and cut their losses like a lot of people I saw do in this industry. Me? I was always a strong believer and still do that business is built on failure as well as success. So, I pushed forward and acquired another property from a wholesaler this one needing mostly cosmetic remodeling and a quick sale which it was but, in this business, when your rehabbing property there is one little part of the equation called inspections. Now remember that 1909 farmhouse I wrote about here in this blog earlier. Well I had gained a reputation with the local inspector and let us just say that it was not a particularly good one. Joe, (not his real name but I had some really special names for him) felt it was is his best interest to figure out how to really do what ever he could to fail me on my inspections for some reason. Let us see how about not having a shower curtain rod in place in one of the two bathrooms, or no splash blocks at the bottom of the down spouts of the gutter system? Yep these are legit in the New Jersey code enforcement book. Go figure. So, my new rehab that was mostly cosmetic remodeling and a three month turn around to put back on the market now turned into six months. On the other hand, that property went under contract and sold over asking price with a concession still yielding me with a full asking price and $50k +/- in profit. I was determined to put a so called no problem, no hassle project under my belt and here comes 2018. The market was slowly shifting, and I was going to experience the next part of my challenging journey. I think a lot of people see what others are doing in this business but with blinders on. They see the projects, the sales, the profits (sometimes) and say to themselves wow that looks easy, I am going to do that!! I was one of those people!! Let me tell you it’s NOT EASY but it is very rewarding and fulfilling and seeing the transformation of these properties for me was HUGE in having that great feeling of accomplishment when the project was completed and the new property owners had closed on their new home. I had people in the neighborhoods of my projects come to me and say I am so happy that you are doing this. This house has been an eye sore for such a long, long time. In addition to the 15 plus years of being vacant farmhouse, I also purchased, rehabbed and sold another house in the same town (township I live in) where the standing vacant time had been approximately 15 years. I was getting these projects done. They looked beautiful and were selling quick usually at or above asking price. Now with the changing market the next challenge was lead generation and marketing. You see back in 2015 just several short years ago I did not do an ounce of marketing. I did not spend a dime. I would call my wholesaler Lenny, every Wednesday at about 4pm and say hey Len what did you get at the auction today? He or sometimes one of his staff would run through their acquisition list I would say I am interested in this one or that one, go out and do my due diligence and purchase at least one. Times were good and no worries for inventory. Now coming into 2018 sellers got savvy. As the market was shifting into a sellers’ market. Even the sheriff auctions got inundated with so called investors who were buying “up” on properties. Now the challenge became lead generation and it was onto the marketing trials. Trials because I had not had to do this in the past, so it was trial and error. You could not go to another investor and say hey what are you doing that is working for you marketing wise? They are not going to share that information because that would be an opportunity for someone to cut into their action!! So, marketing trials it was and let me tell you it is not cheap. We tried list purchasing, direct mailing, cold calling, skip tracing, social media advertising and on and on and on. The $$$ costs kept adding up but the results were not materializing. Currently this was all taking place in New Jersey. My local market. Albert Einstein’s famous line is “Insanity is doing the same thing over and over again and expecting different results.” We were practicing this in the grandest form!! Time to regroup and come up with a new strategy!!

It is no secret that real estate investing is one of the greatest avenues to build long term wealth for yourself, your family, and future generations. The challenge that most investors face, especially inexperienced investors, is raising the capital needed for their investments. What this article will do is highlight several available options that you can use to fund your real estate investments.

The most obvious source of capital for investors is their own personal assets, but in the case of new investors, or investors with limited personal resources, the next best option is other people's money (OPM). Whether you believe in leveraging your personal assets (cash, savings, lines of credit) or other people's assets, you will need to know where the money is coming from and how you can access it.

For Fix & Flippers, liquid capital is essential to purchase projects with cash. Cash is King when it comes to real estate investing. When we first started, our capital was not liquid, which made it challenging to acquire properties and close in less than 30 days. As cash buyers, your capital needs to be available almost immediately for the transaction to close on time, sometimes in as little as 7 days. Most of our cash was diversified into different asset classes like, stocks, bonds, retirement accounts, checking, savings, life insurance, and so on. Instead of liquidating our personal assets to start buying real estate for investment purposes, we decided to leverage OPM and pay a fair return back to our investors, while making a tidy profit.

MONEY SOURCES: OPM & PERSONAL

HARD MONEY

The first and most expensive type of OPM is hard money. Hard money is institutional funding that is approved for fix & flippers to buy and renovate homes. Your traditional bank will not finance these types of transactions in most cases. Hard money has both positives and negatives, but it is the easiest source of capital if you need to quickly close on a deal. Let's start with the positives:

• Fast turnaround - sometimes in 7 days or less!
• Your personal credit usually is not a major factor in the loan, so a credit score under 600 can still qualify with the right deal.
• Hard money lenders can usually fund up to 90% of the purchase (for experienced investors) and 100% of the renovation costs. For inexperienced investors, those terms may look different - 60% of purchase and 100% of renovation costs.
• Purely asset based lending - their money is secured through the asset and not based on personal credit.

Now onto the negatives:

• Hard money generally has high interest rates - 8% to 18% - new investors often pay over 12% interest while seasoned investors enjoy lower rates.
• High fees - 2 to 5 points per transaction.
• The hard money lender may require an appraisal that can slow down funding.
• High holding costs on your project due to interest rates.
• Construction draw fees - $200 to $500 per draw.
• Most of the time, you cannot purchase the asset and cover renovation costs without having your own capital involved - 60% purchase requires you to bring the additional 40%.
• May require personal guarantees.

Hard money has pros and cons, just like all lending options. But if you have a great deal, it is worth paying the higher costs for the money. For example, if your purchase price is $250,000 and your renovation costs are $120,000, but the ARV is $599,000, hard money is a great option because there is plenty of equity available in the deal to cover the high interest and fees.

LINES OF CREDIT

Lines of credit are a great way to fund your real estate transactions. There are many different lines of credit that real estate investors can access in order to fund their deals. Credit lines often have low interest and reasonable terms, which can save you money throughout the project by eliminating fees and high interest costs associated with hard money. Lines of credit may still require some fees to open the line, but the interest rates are generally lower than hard money.

Lines of credit include:

• Business lines of credit.
• Personal lines of credit.
• Home Equity Lines of Credit (HELOC).
• Securities Backed Lines of Credit (SBLOC).
• Cash advances on credit cards (NOT RECOMMENDED)!

Positives:

• Built-in flexibility.
• Open-end credit account, meaning you can borrow, repay, and borrow again without needing to pay the fees to start the credit line.
• You only pay interest on the amount you borrow and not the total line.
• Can be secured or unsecured - unsecured lines generally have higher interest.

Negatives:

• Unsecured credit lines have higher interest rates and require a high credit score.
• Interest rates are generally variable.
• Penalties for late fees are severe.
• Misuse of the funds will hurt your credit score.
• Maintenance fees - monthly or annual.

RETIREMENT ACCOUNTS

Retirement accounts are a great source of capital for real estate investing. The 2 main types of retirement accounts that allow for real estate investing are Self Directed IRA's and Solo 401k's. Many investors choose their retirement account to invest in real estate because of the ease of use and the flexibility the account offers. Not only can you invest in real estate, but you can also invest in precious metals, notes, tax liens, cryptocurrencies, private equity investments, crowdfunded real estate investments, etc.

Positives:

• One of the main reasons why investors choose to use a retirement account, over other investment accounts, is the tax benefits that are associated with this type of investment vehicle. Unlike flipping with personal capital, hard money, credit lines, or other loans, retirement accounts defer taxes on the profit until you take qualified distributions at retirement. So if you make $100,000 on a transaction, you will not be losing 20% to 40% of your profit in taxes. Rather, your full profit is returned to your account to continue to gain interest and reinvest in more deals.
• You can accumulate rental properties with your retirement account, and that profit, too, is deferred from taxes.
• You are not restricted to use the funds only to purchase real estate, you can use the funds to cover renovation costs as well.
• Build and preserve long term wealth.

Negatives

• You cannot buy investments for personal use, so you cannot "house hack" or "live in flip."
• IRS restrictions with strict guidelines that must be followed.
• You cannot take the profits of the investment out for personal use, the money must stay in the retirement account and cannot be drawn upon if you are not at retirement age.

PRIVATE MONEY

Private Money is a loan given to a real estate investor from a private individual, and that money is secured with a hard asset. Private money investors are secured with a first or second lien position on a property, and they are an excellent source for real estate investors to fund their deals. At JSJ, we use private money on more than 90% of our transactions. There are several key elements to private money that make it so beneficial to us as real estate investors.

Positives:

• You do not need to deal with a bank or any other institutional lender, which speeds up the process.
• No fees!
• Gives you, as the investor, a leg up on your competition because you have money available right away to purchase the property CASH.

Negatives:

• Private money lenders generally expect a higher rate of return.