How to Get Money For Your First Deal
As an experienced real estate investor and now also a private lender, I often get asked the question: "If I am a newbie and lenders don't want to lend to newbies, how can I get money for my first deal?"
Looking back over my 10 years of experience and knowing what I know now, here's how I would get money for my first deal.
1) I would focus on finding good deals. If the deal is good, the money follows. I would make a lot of offers and put out a massive direct mail campaign to out of state owners of vacant properties.
2) I would work with rehabbers & landlords and tell them I am their "great deal finder machine." How will I find these rehabbers & landlords? I will spend the majority of my time networking online (BP, Meetup, LinkedIn) and offline (REIA's, Landlord associations, live meet ups, cashflow 101 groups, Rotary club, Chamber of commerce, etc). Instead of me borrowing money without any experience, I will first focus on "gaining" the experience by working with rehabbers & landlords. Wholesaling a couple of deals first will help me gain experience and be familiar with property values in my area.
I met one of my private lenders because I spoke in front of a REIA meeting and I told everyone I have 11 wholesale deals. I never rehabbed a house before but the private lender I met viewed me as experienced because I have a lot of wholesale deals and every time there's a REIA meeting, I always get off my chair and speak in front of the group about the deals I am getting.
3) Talk excitedly about real estate investing to everyone in your network. I talked with my family, relatives, friends, colleagues at work and even strangers I met. My very first investors were my colleagues at work who wanted to get into the action because they got swept by my excitement and energy level. Of course, I put their money into good deals (again, see #1 above).
4) Only after you have a couple of deals, then that's the time you will approach hard money lenders or the banks. These institutions want to see you have experience and skin in the game. As a lender, I want my borrowers to have 10% or more skin in the game and I only lend money to investors who can show they have done at least 3 or more deals.
5) Lastly, have organized financial records (Income Statement and Balance Sheet). I was able to borrow $5M from a bank for a 100+ unit apartment building because I operated as a business and not as a "real estate hobbyist". Obviously, you can't borrow $5M for your first deal from a bank but starting right now, even if you have not done a single deal yet, learn how to be organized in your financial records already. It will impress on your prospective private lenders that you know how to handle money and it will make them feel at ease about lending you money.
So, the above 5 things are what I would do...knowing what I know now...if I am a newbie and I want to get money for my first deal.
What about the other experienced real estate investors out there? How did you get money for your first deal?
Wow, read all the replies in this post and needless to say, there is a lot of great advice for people starting out (like me). I will try to follow your step by step advice @Wendell De Guzman, thank you!
I'm a newby to REI and this may be a stupid question, but regarding your first point "focus on finding good deals; if the deal is good, the money follows" let's say I find a good RE deal that I'd like to purchase. The problem is that without a lender pre-approval or a means to show that I have the money in the bank for a downpayment, I would not be able to enter into a purchase agreement, so the property is not secured. But in order to raise the money I need time to do so, whether presenting the "good deal" to friends and family or putting a case together for investors. It seems like a "chicken and egg" problem; which one comes first? Do I go around raising the initial capital first based on RE deals out there that I know would not come through because I don't yet have the capital, or do I go and find RE deals first to even get a chance at raising capital?
Originally posted by @Han Oh:
I'm a newby to REI and this may be a stupid question, but regarding your first point "focus on finding good deals; if the deal is good, the money follows" let's say I find a good RE deal that I'd like to purchase. The problem is that without a lender pre-approval or a means to show that I have the money in the bank for a downpayment, I would not be able to enter into a purchase agreement, so the property is not secured. But in order to raise the money I need time to do so, whether presenting the "good deal" to friends and family or putting a case together for investors. It seems like a "chicken and egg" problem; which one comes first? Do I go around raising the initial capital first based on RE deals out there that I know would not come through because I don't yet have the capital, or do I go and find RE deals first to even get a chance at raising capital?
Focus on off-market deals. Sellers of off-market deals typically won't ask for proof of ability to finance, which will give you time to find the funding (or sell the deal) after you tie it up.
Originally posted by @J Scott:
Originally posted by @Han Oh:I'm a newby to REI and this may be a stupid question, but regarding your first point "focus on finding good deals; if the deal is good, the money follows" let's say I find a good RE deal that I'd like to purchase. The problem is that without a lender pre-approval or a means to show that I have the money in the bank for a downpayment, I would not be able to enter into a purchase agreement, so the property is not secured. But in order to raise the money I need time to do so, whether presenting the "good deal" to friends and family or putting a case together for investors. It seems like a "chicken and egg" problem; which one comes first? Do I go around raising the initial capital first based on RE deals out there that I know would not come through because I don't yet have the capital, or do I go and find RE deals first to even get a chance at raising capital?
Focus on off-market deals. Sellers of off-market deals typically won't ask for proof of ability to finance, which will give you time to find the funding (or sell the deal) after you tie it up.
I agree with @J Scott on getting "off-market" deals - meaning properties that are NOT listed on the MLS. These come from motivated sellers. You can get motivated sellers through direct mail campaigns, bandit signs and networking with "real estate people" (like real estate attorneys, contractors, etc.) and just asking them if they know anyone who needs to sell their properties.
How active does your business account need to be? If you simply operate out of it by depositing checks into the business account and then taking a draw or something is that enough? Does it have to be consistent?
Also, how simple can your financial statements be? For example, when starting out, can it be as easy as:
+$1000 (wholesale)
-$200 ("salary")
-$500 (Direct mail campaign)
-$100 (miscellaneous expenses)
Profit = $200.
And just grow from there? (Obviously that is a very basic example)
Thanks for the clarification. I'm just wondering, what is the success rate of finding a motivated seller who's willing to sell his property at a discount deep enough so that the deal turns out to be a good one?
Great advise! Indeed, focus on the Critical, but don't forget about the Important.
Originally posted by @Wendell De Guzman:
As an experienced real estate investor and now also a private lender, I often get asked the question: "If I am a newbie and lenders don't want to lend to newbies, how can I get money for my first deal?"
Looking back over my 10 years of experience and knowing what I know now, here's how I would get money for my first deal.
1) I would focus on finding good deals. If the deal is good, the money follows. I would make a lot of offers and put out a massive direct mail campaign to out of state owners of vacant properties.
2) I would work with rehabbers & landlords and tell them I am their "great deal finder machine." How will I find these rehabbers & landlords? I will spend the majority of my time networking online (BP, Meetup, LinkedIn) and offline (REIA's, Landlord associations, live meet ups, cashflow 101 groups, Rotary club, Chamber of commerce, etc). Instead of me borrowing money without any experience, I will first focus on "gaining" the experience by working with rehabbers & landlords. Wholesaling a couple of deals first will help me gain experience and be familiar with property values in my area.
I met one of my private lenders because I spoke in front of a REIA meeting and I told everyone I have 11 wholesale deals. I never rehabbed a house before but the private lender I met viewed me as experienced because I have a lot of wholesale deals and every time there's a REIA meeting, I always get off my chair and speak in front of the group about the deals I am getting.
3) Talk excitedly about real estate investing to everyone in your network. I talked with my family, relatives, friends, colleagues at work and even strangers I met. My very first investors were my colleagues at work who wanted to get into the action because they got swept by my excitement and energy level. Of course, I put their money into good deals (again, see #1 above).
4) Only after you have a couple of deals, then that's the time you will approach hard money lenders or the banks. These institutions want to see you have experience and skin in the game. As a lender, I want my borrowers to have 10% or more skin in the game and I only lend money to investors who can show they have done at least 3 or more deals.
5) Lastly, have organized financial records (Income Statement and Balance Sheet). I was able to borrow $5M from a bank for a 100+ unit apartment building because I operated as a business and not as a "real estate hobbyist". Obviously, you can't borrow $5M for your first deal from a bank but starting right now, even if you have not done a single deal yet, learn how to be organized in your financial records already. It will impress on your prospective private lenders that you know how to handle money and it will make them feel at ease about lending you money.
So, the above 5 things are what I would do...knowing what I know now...if I am a newbie and I want to get money for my first deal.
What about the other experienced real estate investors out there? How did you get money for your first deal?
Silly question but where would I find the addresses of the vacant property owners to do a massive campaign?
Originally posted by @Kai Blackman:
Originally posted by @Wendell De Guzman:As an experienced real estate investor and now also a private lender, I often get asked the question: "If I am a newbie and lenders don't want to lend to newbies, how can I get money for my first deal?"
Looking back over my 10 years of experience and knowing what I know now, here's how I would get money for my first deal.
1) I would focus on finding good deals. If the deal is good, the money follows. I would make a lot of offers and put out a massive direct mail campaign to out of state owners of vacant properties.
Silly question but where would I find the addresses of the vacant property owners to do a massive campaign?
You can get the list of absentee owned properties from listsource.com
Thank you!!
Great post! Thank you for that info!
@Wendell De Guzman. Congrats! Great Post!
For folks who have a W2 income (may be the majority of people on the forum) and have little money saved up, it is very possible to get a FHA loan (first home buyer). Main benefit is that bank will front most of the money (96.5%). That means you will only pay 3.5% upfront. For example, my property manager has just recently bought a 4-unit, $150k and she will be living in one of the units herself. (It was her first house). She gets to live for free and still have quite a bit left for her pocket. Definitely nothing wrong to get your hands dirty (pun intended) to learn the tricks of landlording.
You don't have to do this forever, just learn enough and move on to better and larger things like Wendell says. Every building starts by laying down the first brick.
This is really helpful, thank you Wendell :)
J Scott I saw your reply you made to this post 2 years ago in regards to partnering with new investors to bring in the cash to close & experience while the newbie brings hard work & a good deal to the table. Also, I'm not far from you. Would it still be possible to connect & partner with you?
I have bought 9 properties. Simple way. I saved down payment for the first and bought. Saved down payment for the second and bought. Repeat again. Paid off five properties just to deleverage and reduce risk. Got 4 mortgages and 9 properties. Still trying to expand. Had no experience in RE.
This is excellent! Very solid advice.