In last week's Episode (#18) we covered #1 thru #5 of the 10 Things That Self-Managing Landlords Need To Stop Doing. But due to time, I decided to split the list into 2 episodes. So if you've not already listened to the prior episode, please check that one out first and then continue here with Part 2, featuring #6 to #10 on the list. I get a little political here at points and go on a brief tangent, so please forgive me...

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Intro......

Welcome to Episode #19, Part 2 of "Self-Managing Landlords - 10 Things You Need To Stop Doing!"

So with #1 to #5 having been covered in last week's Episode #18, let's complete the list here with #6 thru #10.

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#6. Stop being ignorant of the law.

Landlord / Tenant Laws in your state and city or county set the rules of the game. You cannot play the game to win if you do not know and have a clear understanding of the rules.

Anything I do, I believe in doing it well. So in part, I decided to get my Real Estate Broker's License and become a Realtor for the education. It covers aspects of Property Management, Financials, Equal Housing Rights, and more. And while practicing law should be left to lawyers, knowing the law will go a long way towards keeping you out of court and situations where you need a lawyer.

Do you know what you can and cannot say in a rental listing? Do you know what are legitimate reasons for denying a certain applicant? What you can and cannot ask on an application or in a prospective tenant interview? What you can ask of references and prior landlords; or how you should respond to inquiries when you're the prior landlord?

Do you know how security deposits must be handled; how much they can be; how long you have to return them; what you can and cannot deduct from them; and how deductions must be reported? Do you know your responsibility for handling documents and private information of applicants and tenants?

It really does go on-and-on as to the various aspects of law you need to be familiar with as a Landlord - or you could easily end up in court facing a judgement against your assets.

Have you read your state Landlord / Tenant law? For North Carolina it's Chapter 42 (or 42A for Vacation Rentals) and you can find it by searching Google for keywords like "North Carolina General Assembly Landlord / Tenant Law" - or go to ncleg.gov - select [Bills & Laws], then [General Statutes]...

They provide HTML: https://www.ncleg.gov/EnactedLegislation/Statutes/HTML/ByChapter/Chapter_42.html

And PDF versions: https://www.ncleg.gov/EnactedLegislation/Statutes/PDF/ByChapter/Chapter_42.pdf

Read it! All of it... at least twice - and then seek legal counsel for anything you don't understand or have questions about. For those in other (less Landlord Friendly) markets, one area of North Carolina law that you may find compelling is 42-14.1 (Rent Control) - that says "No county or city may enact, maintain, or enforce any ordinance or resolution which regulates the amount of rent to be charged for privately owned, single-family or multiple unit residential or commercial rental property." - in other words, no rent control anywhere in North Carolina. North Carolina is a fairly Landlord friendly state.

So contact me and Blue Chariot if you need assistance getting investment properties here or need property management for your existing rentals.

But that's not to say that there are not many restrictions against Landlords in the law - so read it! Learn it! Know it completely. It's the law upon which your entire livelihood is based, so I (and you should) seek to get to the point of being able to site specific chapter and verse, like it were a Bible. You think someone will be foolish enough to take me or one of my Property Management client's to court when I can state off the top of my head exactly which chapter and verse of the law they should read to learn why they're going to lose any such dispute - and then have to pay my court costs as well, because I do everything according to the law? Sure, its possible and may happen someday, but this makes it unlikely and if so, it certainly won't be due to my having been ignorant of the law.

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#7. Stop using leases you got from Office Depot, Staples or just found somewhere on the Internet.

Listen to Episode #11 - Make Sure Your Lease Protects Your ASSets - for details on how you should be handling your lease. As I state in that episode, your lease can be both your sword and your shield in dealing with tenant issues.

And if you do take the time to read your state Landlord / Tenant Law, and if its anything like North Carolina - you'll find certain references to things the Tenant is NOT responsible for "unless he so contracts" (or similar language). This means that unless your lease (the contract) states otherwise, the Tenant is not responsible for that item or element or matter. So if you end up there, you may be in court thinking the Tenant will clearly be held liable for something, only to find out that the default position of the law is NOT. But your lease, if it says that they are, then they are - but only if it's covered in the lease to place the burden on the Tenant, as the law's default position may be to place the burden on YOU (the Landlord).

Some template lease you got from some random website or store is unlikely to address all potential matters properly and in your favor. You not only want a state specific lease drawn up by a lawyer in your state or from a site or service that keeps current with your state law - but you also want it customized to your specific situation, best practices, policies and procedures.

And then you want to be able to explain it and reference it properly at tenant on-boarding and in all tenant communication that may speak on an issue or matter covered by the lease. Doing so can save you many issues and headaches.

Anything's possible, but you're far less likely to end up being taken to court someday because a tenant was upset that you deducted a cleaning fee or some other damage done from their security deposit at exit. Or that you charge them as additional rent due in the following month for a plumbing bill from clearing a clog that they caused.

Such matters are much more easily resolved when you can point to the specific page and paragraph of the lease that they signed at tenancy start which explains the policy and this exact handling. And when you refer to the same in each communication with the tenant. And when you went over the critical elements of the lease with the tenant during the on-boarding (preferably on video) where they confirmed to have read the lease TWICE. All this contributes to making it hard to dispute the lease later.

But that really only applies if you have a state specific lease that has been customized to your exact policies and procedures.

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#8. Stop using cheap finishes in your rentals.

This weekend I was in a partially furnished rental home that was certainly valued at over $300,000 - with WHITE appliances in the kitchen. I put stainless steel appliances in my rental homes that are 1/3 the value. Now if it already had white appliances when I bought it, and they are in perfectly fine condition and good working order, then sure - but if I'm buying new appliances anyway, pay the extra few hundred dollars to put in stainless steel. It will make your pictures pop and make the home more desirable even at a slightly higher rent. And the new appliances are a tax deduction anyway! And likely to be fanciable at 0% interest for like a year or year and a half or more!

So you may be able to pay for the monthly cost of the upgraded appliances with the additional rent you can get by having the better appliances in your rental. And its hard to know and quantify, but your tenant may stay longer (saving on tenant turnover expenses) because of the feeling your upgraded appliances and other improvements give them for the home.

So go ahead and improve your rentals, increase your tax deductible expenses, while increasing the desirability and likely rent for the home, thereby potentially increasing income. And like I said, when a tenant really loves a home, they are likely to remain longer - thereby lowering your vacancy and tenant turn-over expenses.

So upgrade! Put in granite counters, tile floors, resurface kitchen cabinets and bath vanities. Improve the vanity tops. Put in upgraded light fixtures. And while I don't do hardwood flooring in rentals, I love the so called "luxury" vinyl plank flooring that is durable, waterproof and looks great. Whenever I'm replacing flooring anyway, I go with that over carpet every time. It last for years potentially spanning multiple tenants, and so any increased cost upfront is quickly recaptured - and again, it's a tax deductible expense to begin with and likely able to be financed at 0% interest for a year or more.

So while not over-improving for the location, property class and rent range - make your rentals really nice and durable (tenant proof), put in decent tenants, and inspect regularly. Which brings me to the next item on my list...

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#9. Stop failing to conduct rental property inspections.

So you put a tenant into your rental home that may be valued at $150,000 (granted maybe yours is worth a lot less than that, but possibly a lot more) - but regardless, it's your Real Estate asset upon which your present day passive income and future retirement dreams are based, and you never step foot in the home again during the tenancy!?

Stop putting tenants into your rentals and going ghost - never showing your face again for months and years. I inspect each of my rental homes as often as quarterly in the beginning. Then depending on how those first inspections went, I may drop back to semi-annual - which goes even for those tenants I've had for years. Even if every inspection has been passed without issue, I still inspect each rental at least twice per year - NO EXCEPTIONS!

Yet most Landlords (even those with so called Professional Property Management in place), rarely (if ever) step foot into their rental homes (or have someone do so on their behalf) after a tenant is in place. And then you wonder how your home got trashed so badly. It likely didn't happen over night.

Had you stopped by from time to time for an inspection and made it known to the tenant that you'd be doing so on a regular basis - just that knowledge is often enough to effect tenant behavior to the benefit of the Landlord and your property. It also turns away potentially problem tenants who don't want to deal with inspections, as they know they won't pass. And I'm not talking about surprise visits (that's likely illegal in your state, as it is in mine, other than for legitimate emergencies like flood or fire) - see #6 earlier about knowing the laws. I'm talking about scheduled and announced visits, so the tenant knows well in advance exactly when you are coming and why (for an inspection, as should be detailed in your lease) - see #7 about your lease.

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#10. Stop denying potentially great tenants based upon their credit score - (political opinion alert).

Some of my best tenants had horrible credit scores. And if you look closely at their credit report, you'll see that the reason for many applicants having poor credit scores is often due to student loans and medical bills. Well if politics were the focus of this Podcast, I could do an entire episode on the financial crime that is being committed against a generation of young people - charging them all-time high amounts for tuition and text books to often obtain worthless degrees. Having them take out loans to pay for it all that cannot be discharged through bankruptcy, so they follow them around for life and ruin their credit. Which then means they cannot get decent housing (because you and other Landlords deny them over credit) - and even if their degree wasn't worthless (which it often is), they likely can't get a decent job either (also due to their poor credit).

Now I'll try to avoid my tendency to speak on matters of politics (that's not the focus of this show), but I'll just say that if the government wasn't guaranteeing student loans, and students had to pay for their own education directly - it would cost a fraction of what it does now to get an education. And then far more people could afford it, without killing their credit by taking out loans that far exceed what they can ever hope to repay with the job their degree may qualify them to obtain if it wasn't worthless.

And then medical bills also becomes a political discussion, because just like with education, when the person receiving the benefit is not likely the person paying the bill, then prices skyrocket (EVERY TIME). If you placed a claim against your car insurance each time you needed an oil change, or a new battery or tires - auto insurance would cost over $1,000/mo and an oil change would cost like $500 or more. Likewise, every time we go to the doctor for any reason, it's paid by insurance most often, which is one of many reasons why medical anything cost so much. And if you or your child is sick or injured, you're going to the hospital regardless of what it costs. And if you don't have great insurance, you're going to end up with a medical bill that you cannot pay - and your credit is going to be ruined as a result. so now that should prevent you from having decent housing or getting a job!? I'm a pretty conservative guy in my political views, but I just don't think so.

So, sorry for the tangent - I stopped debating matters of politics when I needed to focus on learning the business of Real Estate - but I do have some pretty well established political beliefs - maybe I'll run for congress in 10 years or so. But my point is that low credit scores due to past due student loans or delinquent medical bills are irrelevant to me... Don't care! What I do care about are collections for utilities (electric and water), phone, cable - and other things that are daily household bills that are not a government price inflated trap that anyone of us could fall into - as in many cases you have no choice. I care about liens, judgments, repossessions, and collections - that are non-medial or student loan related.

I'm not going to deny someone housing because they got treatment for their sick or injured child and the hospital charged them $800 or a bandage (thinking it would be paid by insurance, but it wasn't). I'm also not going to deny someone housing because they tried to better themselves with education and a corrupt system dumped $200,000 of student loans on them for a degree that might earn them $50,000 per year if they're lucky.

You can't likely buy a $200,000 house on $50,000 per year of income, but you can get student loans that are even worse. As with the house you can at least file bankruptcy or let it be foreclosed upon - but you're stuck with the student loans for life! And many times you don't even obtain the degree, because you're tapped out on loans before you get there. Shameful what's being done right now to young people. There should be a student loan revolt where everyone just stops paying. But here I go again speaking on politics. And I'm sure someone will argue that they knew what they were getting into and agreed to take the loan.

Yea, sure setup a system where you're almost required to have a degree to be employable; make that degree like 4 times more expensive than it should be (and was just 30 years or so ago); and then blame the person for agreeing to pay the inflated price for the often worthless degree (like they had much of a choice) - who then can't get a job paying enough to afford to pay the bills. And then Landlords and employers use their now poor credit as an excuse to deny housing and employment. That's fowl and it cannot continue - and I won't participate by being one of those Landlords denying prospective tenants based upon credit score. I need to see something else of concern on their credit report besides student loans and medical bill related collections. I care far more about a $50 cell phone bill or cable bill collection than I do about a $50,000 delinquent student loan or $5,000 of unpaid medical bills. I don't care about those at all! And I don't think you should either if you're a Landlord.

So stop setting blanket credit score requirements. I see all the time where Landlords refuse to accept anyone with a credit score lower than X, with X being 600 or maybe 620. And at least some go lower, like 580, but any blanket number is just lazy in my opinion. Look at the report and see WHY the score is low, and if its student loans or medical bills, then ignore that... I feel like cussing.

And if it makes you feel better, you can always use the score and other factors as justification for charging a higher security deposit. I advertise my rentals at 1.5x rent as the security deposit amount, and I may lower it to 1x rent for better quantified applicants; or increase it to 2x for those with more significant credit challenges - where nothing else is a disqualifying factor.

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OK, now I'm thinking about politics... I could continue this list with #11 and beyond, but now I'm on my soap box (as the expression goes) - so everything I say from here on will likely have a heavy political bent. For that reason, I'll stop it here... 10 is a nice round number, and if you implement these changes into your Landlord business, it will be greatly improved and you're much more likely to be successful. And as I've mentioned before... If you don't want to have to deal with any of this and you're in the Raleigh / Durham area of North Carolina - hire me and my team at Blue Chariot Management to take over your Rental Property Management duties on your behalf. Checkout the website at: BlueChariot.Management (not .COM / .Management and no need to start it with www) - because its not 1996 and we no longer call it the World Wide Web.

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Outro...

Disclaimer...

Intro...

Okay, okay, okay, today’s episode is not just about my first new build, but this is also the first episode of the Podcast with a guest. I know I've been saying that I will have guests on this show for a long time – since the first episode – However, forgive me, I've had a lot to say. My guest today will be my business partner in our first new build endeavor together, and he is a real-estate investor himself. His name is Garrett White.

Welcome to Episode No. 17 – My First New Build House (Ground Up Construction On An Existing Lot) In Partnership With Garrett White.

As you know, Blue Chariot is many things; Blue Chariot Properties, Management, Realty. This Podcast is brought to you by Blue Chariot Media, where there’s also Blue Chariot Homes, which is a partnership between me and my guest today, Garrett White. Blue Chariot Homes focuses on wholesaling, flips, and now new builds; basically aspects of real-estate investing where you typically buy and sell the property in under one year, which is considered a short-term investment.

Now, you know, I'm a buy-and-hold guy. I like rental properties, so, flips and pretty much selling anything is against my nature. But I'm not a fool. I fully realize there’s money to be made in wholesaling deals that are not right for long-term hold as a rental. And I know that it makes perfect sense to sell a home when pretty much it’s certain to sell quickly for top dollar, thereby creating more cash to buy more rentals, like sell one, buy three. But my primary focus is, and always will be long-term rental properties. So, I partnered with Garrett so that he can focus on short-term properties. This is great, as it allows us to leverage the same tools, systems and processes to acquire the properties, and then only what happens post acquisition is different.

Blue Chariot Homes is our partnership for short-term hold properties. And we’ll certainly come to own long-term rental properties together, eventually, as well. Garrett is also working with me on my latest endeavor – Blue Chariot Management – that I announced in Episode 12.

So, joining me on the show now is Garrett White. And like myself, Garrett has a business outside of real estate. Mine being Websites and Web-Hosting, and his is called Cryo NC. So, first, Garrett, introduce yourself, please, and then tell us about your business.

Garrett

Thanks for having me on. I'm really excited to be here today, and I've been listening to the previous Podcasts you’ve been putting out with great content, so, hopefully I can contribute a little bit.
But, a real quick background, I'm originally from Philly, went to school in D.C at Howard University. I met my now-wife there. Moved down here about five to six years ago, and I'm loving it down here. Up until then I was working HR for Bed, Bath and Beyond. I was miserable as J.T knows very well. I couldn’t wait to expand my wings a little bit, and take on my own personal ventures, one of which I wanted always to be real-estate. And so, now Cryo NC is starting to really get off the ground, and if you’re not familiar, it’s when you expose your body to sub-zero temperatures. J.T has been in there, once or twice, and felt the chill a little bit, but it’s about holistic wellness, and we’ll be expanding over the next year or two, and opening up a few more locations. So, if you’re in the Triangle, we’d love to have you come up.

Jonathan

Okay, so I’ll want you to mention later how those who are local to the Raleigh/Durham area can find you and stop by for a session at Cryo NC. And yes, I've done it. It is cold, but very relaxing, especially after a workout. But now, tell us, how did you get started in real-estate?

Garrett

Yeah, so, I got started with wholesale deals, and I would definitely say it was far more education than action. And so, I spent a lot of time Youtubing. There were some free DVD’s out there that certain investors have put out, so I was just learning a lot as I went. And in D.C, I kind of started at an ideal time where there was a lot of inventory, and also the economy was going up, so there were people to wholesale to.

Moving to Durham, I'm trying to re-create that. It was much more difficult when I first moved down here, because it’s a hot market, and there are a lot of seasoned investors who have been investing in this area for a long time. Coming into that from a completely different area, and not knowing the layout, it was very hard to re-create the same model in Durham that I did in D.C. I went to learn something else again, and wanted to find something of a mentor in real-estate, and that’s when I reached out and met you.

Jonathan

Okay, so we came to meet each other through Bigger Pockets, when I was about two years into my real-estate investing journey. How did you find me on the site? Or what brought me to your attention?

Garrett

Yeah, honestly, we probably started around the same time. It’s just that we went into different methods, with you, the buy-and-hold, and me, wholesaling. But during that time, I learned about Bigger Pockets, which is a huge forum. I could ask a million different people a million different questions, and you get honest feedback from a lot of different perspectives.

So, when I went on there around the time I reached out to you, I was looking for something specific in terms of a new way to approach real-estate; not just wholesale, but find people who have different resources and different perspectives. When I saw that you had posted about, I believe it was lease options that caught my attention, I reached out to you and probably about four to five other people who were local to Durham, just to meet over coffee. Out of all those people, we had by far the best initial view of long-term growth and goals to set, and when you told me about your vision for Blue Chariot, I knew I wanted to be a part of it.

Jonathan

Okay, yeah, I remember our first meeting well, and we’ve done a lot of learning together since then. Our partnership has evolved slowly, and it’s included additional education, attending events in Vegas and Atlanta, and other locations, to which we’ve travelled together for training. We’ve started marketing for deals, motivated sellers, and we’ve had some good opportunities come our way, but for one reason or another, nothing major materialized initially for the first couple of years that we tried to work together. Things are moving along now, but what would you say about relationship building and starting relationships with other investors or potential business partners?

Garrett

You said it perfectly. It’s about the relationship. You can’t focus on the transaction or just the deals that you’ve done previously. It’s about getting to know that person. You typically work with people that you like that you can get along with and have clear communication with. I think the number one sustainer of our relationship is that even if these deals that didn’t go the way we wanted them to, we had clear communication and understanding going into them. So, any problems that arose, there wasn’t a problem between you and I.

And so, I recommend that for anybody who’s looking to do business with other people. Make sure you’re honest, and make sure you’re very crystal clear on what you’re looking to get out of the deal, and try to predict any downfalls that can happen, and already have that language in place, so there’s no confusion or issues moving forward.

Jonathan

So, you think it’s a good idea to develop a friendship with a potential partner before you become involved in business with them?

Garrett

It’s not 100 % necessary, but I think it does add to the comfort-ability of the conversation. We’ve done racquetball, we’ve travelled for these conferences, we’ve been to different family outings, and I think that just helps to be able to build the business portion as well to the point where we’re now successfully moving forward with the project.

Jonathan

So, would you say that having been beaten down in racquetball multiple times by me made our friendship better for business proposition?

Garrett

I think your memory is a little fuzzy on those competitions, but competitive competition has always helped team bonding, and all that good stuff, so I do think it has helped and we’re better for it.

Jonathan

Okay, I see what you’re saying. But yeah, I do think that the relationship that we developed was initially based upon friendship, and a mutual respect for what the other person was doing and was capable of doing.

Garrett

Absolutely.

Jonathan

And then everything just kind of fit together, but there were some difficulties getting going on which venture to move forward on.

Garrett

And I think that was from our backgrounds. You have a buy-and-hold background, and I was more of the upfront-money with the wholesaling. And so, while I was pushing for short-term deals, you were looking at long-term, and so, again, building the relationship and understanding why you were looking at it one way, while I was looking at it a certain way and trying to make the best out of every situation. I think that’s why we had a learning curve to get to this deal now.

Jonathan

Do you think our age difference might have factored in there as well?

Garrett

Yeah, we’re in two different spaces, financially. And as I'm trying to build up my war chest, so to speak, you’ve been on the path that’s already gotten you to a point where buy-and-hold made more sense, and I just wasn’t ready for that.

Jonathan

So, now, we’re doing a new build house which I'm just completely proud of every time I drive by it. But let’s talk a little bit about some of the prior projects that we tried to do. One of our first attempted flip projects together died due to black mold being present in the property, and not being able to get the lender required insurance for that reason. I'm going to talk more about that specific project in a coming episode.

Garrett

So, the same reason that the new build project is able to take flight and that black mold property wasn’t, is that we don’t have the same team in place. We have a great GC working on the new build, but at that time we just didn’t have the right people to take on that size of a project. Everything is relative. I think right now, if we put our minds to it, we will be more than comfortable to take on a six figure plus rehab. But at the time, that just wasn’t the case.

Jonathan

And then another of our attempted flip homes, it was actually after we got further into it that it became obvious that we had greatly underestimated the required rehab. So, we ended up selling that house to someone who had more extensive rehab experience than we had at that point. It was something we, or maybe just I, wasn’t comfortable with at the time, and it was basically a knocked-down new build, something that at that time we had never done, nor had we done a six figure rehab at that time.

Garrett

Yeah, you’re right. I don’t think either one of us was fully comfortable with that project at the time, and getting out of it unscathed was the best way to go. And now we’re doing a new build, and if that same project came along today, we would be just fine. Yeah, it was just timing.

Jonathan

But then in the year following those failures, I took on some personal projects that did involve six figure rehabs. So, I gained that experience, and then we built our connections of lenders and contractors and subs, giving us the confidence and connections to take on some more aggressive projects, which brings us to where we are now; doing a ground-up construction, new-build house for sale, together.

Jonathan

So, now we’re doing a new build on Carver Street, in Durham. This is our first new build, of which I expect there will be many more. It’s a spec home on a vacant lot next door to a duplex that I own.
So, one day, Garrett calls me, and he’s looking at a home listed for sale, and puts me on the phone with the listing agent. I don’t recall why, but that specific home did not work out. But I asked if he had anything else available, and he mentioned an unfinished potential duplex on Carver Street for $155,000. It was a three bedroom, one bath house, with a potential fourth bedroom if a closet was added. And it had an unfinished attic that had started to be converted into an additional two bedroom unit, but what little had been done, it really needed to just be all ripped out and done over again professionally.

I went back and forth with the seller of this property for months, but ended up buying it for $130,000, including the adjoining vacant lot. I completed a six figure rehab on the property to make it a four bedroom lower, and a two bedroom upper duplex. And now we’ve started our first new build project on that vacant lot, which was essentially free because it was thrown in as a part of the prior purchase, and so this is the start for the joint venture on our first new build together with Garrett and myself.

So, Garrett, tell me about the new build process. What’s been going on so far?

Garrett

So far it’s been great. I’m loving the process so far. I can't remember the exact connection, but we had come across a general contractor, and he made us extremely comfortable out of the gate. He had the floor plan, every expense down to the nail, and just made it very easy for us to get started. Straight-forward again, communication is key, and it’s been awesome.

We’ve had one little hiccup in terms of a well that needed to be remediated, so we had an outside company coming in and doing that. There’s a little bit of junk left over on the property that the current tenants are responsible for, and that should be cleared up as we speak. Other than that, the construction’s been going as scheduled as promised, so I'm extremely happy.
My role has been as a project manager. I stay in constant communication with our GC, and relay that information, so we’re good on our side.

Jonathan

So, what kind of house are we building?

Garrett

It’s going to be a spec home; three bedrooms, two and a half bath, just shy of 2,000 sq. ft. And so, it’s a nice open floor plan, and I'm just really excited to get it on the market, which is plan A, with your need for dual exit strategy, which I respect. It will also be a good rental home if we decide to keep it as a buy-and-hold.

Jonathan

And so, this project is basically a no-brainer. Everything fell into place to make this an ideal scenario, but how are we going to continue this? How are we going to repeat it? What’s our next project going to look like?

Garrett

So, it comes down to, I think, relationships again; keeping a good relationship with our current GC, and expanding our network, so to speak, with different lenders who might be able to come in on those deals. We’ll be targeting several different pipelines to acquire more lots, and hopefully we can get lucky again with a purchase of a property that includes a lot again. But using probates, motivating sellers, and any means that we can come across a sweet, hard deal that we got on this lot, and just continue to repeat the process, it looks like. It’s going to be a great win for us.

Jonathan

So, we still do pretty extensive marketing in the area to find motivated sellers through direct mail and online means, but do you see us ramping that up and being successful with getting those types of deals even in this aggressive market we’re in now?

Garrett

Of course. Again, it’s a really hot market, and a lot of investors are here, so, you have to find a way to stand out. But in general, with this project under our belt, it opens up the budget for more marketing as well. It allows us to do on a private, and joint, venture together to advertise for different types of deals. I definitely want to get into more buy-and-holds after this, but I'm loving this process so far. We’ll see where it goes.

Jonathan

So, Garrett and I will continue our partnership on short-term hold properties, be they rehab, to flip, or new builds, and we’ll certainly get into long-term buy-and-hold properties as well. Garrett’s also a part of my property management company; Blue Chariot Management, where we’re not only managing my own properties, and will become his properties eventually as he adds to his portfolio, but also providing property management for third-party landlords. And we’ll also continue working to bring on investor funds. I'll be doing a show soon on working with private lenders.
So, I see great things coming for not just myself, but for Garrett White, and for Blue Chariot in general. And I'm proud to have Garrett be a part of Blue Chariot and what we’re trying to do here. So, Garrett, is there anything else you wish to state about your personal business, Cryo NC? And how should we reach out to you if we want to get frozen?

Garrett

I’m excited to grow Blue Chariot as well. Property management, I think will be a great opportunity for the both of us. I'm excited to continue to grow that.

When it comes to getting frozen, though, whole-body cryo therapy is definitely our focal point, but we will be having a grand opening of our first full office space, which will include a couple of other modalities, such as infra-red sauna, Normatec massage therapy, as well as localized cryo therapy, which allows us to give cryo facials, spot-treatment for any achy backs, knees, elbows, anything like that. But also, body contouring is going to be our next big draw, which will allow us to be able to take off some inches off of the waist, reduce celluloid, and it’s really good to get those beach bodies back together for you. So, I'm definitely excited to open up and have that come this fall. But in the meantime, if you just want to get a whole-body cryo therapy session, we do have a satellite office in North Raleigh, off of Falls of Neuse Road. Feel free to check out our website at http://www.cryonc.com.

I’m just excited for everything that’s come this year. It’s going to be pretty fun.

Jonathan

Thank you, Garrett. Thank you for being on the show, and I can't say enough about the fact that you went out and started your own business. I commend you for that. It’s a risky endeavor, and a lot of people can't do it. But the fact that you did, I hope everyone goes out and supports the business. It’s a great service that you provide. It’s certainly something that you should try out if you’ve never done it before. Cryo therapy is really cool.

Okay, well, that’s it for this episode, and we’ll certainly let you know how the new build endeavor, on Carver Street, in Durham, turns out. I also expect a lot more from the partnership of Jonathan Taylor Smith and Garrett White.

We’re always open to partnering on a deal. So, let us know if you have a property that you’d like to sell, or something you’d like to run by us as far as what we might be interested in buying, or partnering with you on.

I love entrepreneurs, especially young individuals who, instead of going out and getting a job and working for someone else, like most people do, they actually take that big risk of starting their own thing. That’s why I've always recommended that everyone have some business. It’s just the best way of supplementing your income, and it gives you the money that you need to be able to do other things like invest in real estate. It’s not the easiest route, but it’s the most rewarding. So, go out and get yours. Garrett is certainly getting his, and he’s an example of what you can do if you really put your mind to getting out there and taking a risk and trying to do something else.

Outro...

This is Part 2 from last week's episode, so if you've not yet listened to Part 1, please go back and listen to Episode #15 first. So now let's continue our conversation on Where To Get The Money!

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Intro...

Welcome back to Part 2 of Where To Get The Money? Using Other Peoples Money (OPM) For Real Estate Investing Success - Ep. #16.

So let's continue the discussion, moving on to Private Lenders. This is where you really want to be as a Real Estate Investor. You'll often get the best terms, lowest rates, low to no points, and funding for 100% of your deals, including both the purchase price and rehab budget. You could literally buy and rehab a house through sale or refi and never have to come out of pocket with any of your own money - a deal done from start to finish with 100% Other Peoples Money.

But this way of doing business brings with it immense responsibility of ethics and character. You absolutely CANNOT do anything to cause the loss of your investor's money. As such there'a certain ways you must handle things to protect your investors even above projecting yourself. YOU should be the one taking any risk - NOT your Private Lenders. But then this gets into an entirely separate topic for which I can do a show of its own - "How To Protect Your Private Lenders From Risk".

So now for THIS episode, let's just stipulate that you'll be doing everything properly, and in another episode to come (maybe also some later in this episode if I have time), I'll lay out for you how exactly to go about protecting your Private Lenders. So now until then, I'll just speak to where and how to get the money - NOT how to handle the money after you get it.

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In most cases, excluding maybe close friends and family, you'll likely have to be able to show some sort of track record to get Private Lender funding. But if you're fortunate enough to have friends and family with enough money and they trust you enough to lend on one of your initial (or even first) project - Congrats! But please proceed with extreme caution. Make sure it's a slam dunk / no brainer project on which you can make several mistakes and still turn out well. I'll speak more on this later and in that coming episode on how to protect your Private Lenders.

One of the first skills you'll need as a Real Estate Investor is the ability to analyze potential deals. Not just that you need to be able to know for yourself what is and is not a good deal - that is likely to result in profit. But you also need to be able to relate the strength of your deal to your Private Lender. You'll need to be able to show them how this deal allows you to pay them back, WITH INTEREST - and still make a profit for yourself. Just be careful about that, as some greedy Private Lenders will then focus on what you stand to make, and will get caught up in counting your money.

If so, this is good indication that the person will not lend you any money, and even if they would, you still may be better of finding someone else to work with. Because you are the investor. You're the one with the knowledge and skills to find great deals on distressed property and rehab them into rentals or for sale as flips. If the potential Private Lender had these skills, then they should be doing what you are doing. So if they do not value your role enough to not begrudge your profit in the deal, then it may not be the makings of a great partnership. But there's an exception to this I'll explain in a moment.

What you want is that doctor, dentist, lawyer, executive or any typically highly paid individual - who is also typically too busy with their own profession to become a Professional Rental Property Investor / Landlord or Flipper. But they know that you've done the work to become capable (even if not yet expert) at one or more of these. They are then thus happy for you to do your job, while they continue to do theirs. And they'll be happy to earn a nice return on their otherwise idle funds. Or even if the funds are not idle, maybe you are able to bring a higher rate of return or a more secure and/or consistent return.

These are the type of Private Lenders you want, but at risk of contradicting my prior comment, they need not be debt lenders only. Greed can creep in on both sides... You might be able to create some of your best partnerships by not being greedy yourself and giving up some equity in the deal if it truly is the case that you'll be making a killing, which is why the potential Private Lender might not be able to help themselves counting your money. Imagine how willing to partner with you the right dentist or doctor might be, if she or he not only gets a great return on their money, but also builds wealth by obtaining a reasonable equity stake in your growing rental property empire.

I've not given any equity to Private Lenders who funded some of my single-family and small "plex" rental properties; however, as I move into acquiring larger properties through syndication, I will be giving both a return on the debt loaned to the project and some percentage of equity in the deal. But in such a case, the amount invested may be higher, as may be the length of the investment longer, and the security to the investor is different (but more on that later, or in a different episode on protecting your private lenders or maybe on deal structuring.).

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Before I started seeking Private Lenders, I created what can be referred to as a Private Lender Credibility Packet. Among other things, this contained a 25 or so page booklet about me, my company, my partners and team members and my prior projects. It also spoke a great deal on the process and benefits of being a Private Lender.

Upon a potential Private Lender showing interest in learning more, I would arrange a meeting with the person (if married trying to get BOTH husband and wife to attend this meeting) - and I'd leave the booklet with them for review on their own time if it appeared as if they might be interested in moving forward. I really would not even mention the book at the meeting - it would be just something sitting off to the side. The meeting would be all about getting to know them, learning their needs, and allowing them to meet and learn more about me.

Not every potential Private Lender will be a good fit, as they may not be seeking to lend for a long enough period of time (I require 18 months with an option to extend to 24). Or maybe they don't have enough to lend, as a 1st position lender must be able to fund the entire purchase price, which may be $100,000 (or more), but not likely less than $50,000 or so.

And a 2nd position lender must be able to at least fund the rehab, which is most often at least $10,000. It can be harder to work with smaller amounts in a secured position. And since these booklets are full-color / double sided printing (they're expensive to print and bind), so I don't leave them with a person if it's obvious they're not ready and able to proceed. Although I will still add them to my CRM with automated follow-up forever, as circumstances can change at any time.

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My Private Lender Credibility Packet and the booklet is meant to answer common questions that every person will have before lending their hard earned money. The person needs to know who you are, what you do, how you do it, how / when and where you learned to do it, and on / and on / and on. They will and should have a ton of questions and you'll need to have confidence building answers. This is why outside of close friends and family, you may be best served to fund your initial deals with Bank or Hard Money Loans, as I mentioned on Part 1 in Episode #15.

But in my case I must also confess to a certain mental block when it comes to friends and family. I know many family members and friends with the money to invest in my deals, but for some reason I never feel comfortable asking them to be a part of what I'm doing. I was listening to one of the older episodes of the BiggerPockets Podcast and the guest on that show mentioned that this was of thinking is actually doing a disservice to my friends and family by denying them the wealth building opportunity created by my efforts, that I apparently have no problem making available to strangers. And I can see that as true, but I've always just had the thought that business is business and that friends and family should NOT be mixed with business. Like I'd never rent one of my homes to a family member.

But then it occurred to me the reason that I would not want to rent to a friend or family member (Landlord / Tenant relationship) is unrelated to the dynamic that's at play between me and a Private Lender. I wouldn't want to be Landlord to one of my friends or family members as Tenant, because they're going to expect me to be lack on my lease and rules I apply to all other Tenants (like imposing a 5% late fee and posting a 10 day pay or vacate notice on the 6th when late on rent). They're not going to want me to treat them the same as I treat all other Tenants in a strictly business relationship.

But in the case of my relationship with Private Lenders, there's nothing for them to do after funding the project. There are no rules for them to follow. No expectations for them to meet. No favoritism they could want or expect from me. It's not like they would expect me to pay them EXTRA or HIGHER interest just because we are friends or family. When it comes to Private Lenders, all the expectations to follow rules is on ME. I'm the one that has to perform. And since I know for certain that I'm going to do what and all that I say - being reluctant to work with friends and family members as my Private Lenders makes no sense unless I doubt myself. And with the possible exception of my wife and son, no one has more confidence in me than I do. So far as it depends upon me or what's within my control, I know that I'm always going to do the right thing - so why wouldn't I make this opportunity available to my friends and family.

So, likewise, if you know that you're going to go about things the right way, with un-failing ethics and morals (protecting your Private Lenders over even yourself) - then let the world know what you're doing! You may be surprised who might just want to be a part of it - and earlier in your journey than you might otherwise think. But I'd still recommend extreme caution if considering starting out funding your initial or first project with a Private Lender - unless they're someone like myself, who is acting as both the Private Lender and Mentor or Coach to guide you through this project. Which then brings me to another aspect of Where to get the money - other Investors as your Private Lenders!

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Have you ever heard of a Self-Directed IRA?

It's one of the best ways to work with Private Lenders in general, but its especially effective when the other party is also in the business of rehabbing distressed properties .

Self-Directed IRA's can be a show in and to itself, so I'll work to get a guest on the show who can speak to this topic as an expert (I'm not). But one of the critical limits of using a Self-Directed IRA is that you cannot fund your own projects. That's called self-dealing and it creates what is called a prohibited transaction.

So if you're a person like me in the business of rehabbing distressed properties into rentals or to flip, and you've got money in a Self-Directed IRA - I can't use that money to fund my own projects. Instead, I must find some other person (like you) and use this money to fund their project. And then hopefully in return they can use the money in their Self-Directed IRA to fund my projects.

As a result of this limitation on Self-Directed IRA's, you may find that some of your best Private Lenders are people you may have previously looked at just as your competition. They may be in your same area, marketing to the same property owners looking for deals on the same houses, bidding on the same properties at auction as you. But you want to get to know them for a variety of reasons, not the least of which is they may become your next Private Lender. But even more so, they may become your FIRST Private Lender, as they're experienced in the business, know if you've got a good deal on your hands, and can likely help you through it safely - while making some tax-free profit in their Self-Directed IRA in the process.

But even if not a fellow Rehab Investor, learning about Self-Directed IRA's is important for you as a funding option from anyone with money in an IRA or 401K from a former employer. In the current economic state, many people are expecting a downturn that could easily take half or more of what they now have that's invested in the stock market within their IRA or 401k. You can educate them on Self-Directed IRA's and connect them with a custodian who can aid them in making a tax-free transfer of those funds out of the volatile stock market and into one of your projects at a fixed interest rate that's competitive to what they had been getting in the stock market (if not better) - but that is now secured by the property that's worth far more than what they've loaned. In this way, you could literally be saving someone's life savings from a coming loss by getting it out of the stock market - maybe just in time.

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So while I will be doing a complete show soon on how to protect your Private Lenders from loss, I do want to briefly mention here a few critical things... When someone lends on one of my projects as a Private Lender in the 1st position (meaning they have a 1st position mortgage against the property). They are typically funding 100% of the purchase price for the property and potentially some amount (if not all) of the rehab budget.

But this money is not coming directly into my hands. Everything is handled by the closing attorney. Just as would be the case with a Bank or Hard Money Lender. The Private Lender wires the money directly into the closing attorney's escrow account. That attorney then uses those funds to complete the purchase of the property, giving the Private Lender a Deed of Trust (North Carolina is a Deed of Trust State) and a Promissory Note. Both documents get recorded with the Registry of Deeds Office of the County, such as Durham County.

The Promissory Note details all of the loan and payment terms, such as interest rate, due date and amount, loan / term length, and everything. This gets attached to the property via the Deed of Trust, which creates a lien against the property on behalf of the Private lender - again, no different than would be the case for a Bank providing a Home Mortgage. The Private Lender is now essentially the Bank who really owns this property, as they have the right to foreclose if any of the Promissory Note terms are violated, such as not paying on time or failing to repay the full loan amount by the end date.

This protects the Private Lender, as the home cannot be sold without paying them back in full. If it were to burn down to the ground, they are set as the loss payee on the insurance policy - so another form of protection. And if I got hit by a bus or caught scumbag disease and failed to uphold my commits as detailed in the Promissory Note for any reason - the Private Lender can foreclose on the property by just employing the services of an attorney or deed in lieu of foreclosure. First, I would NEVER let such a thing happen, but if it did - Yes, there would be a cost to the Private Lender of both time and money. But another form of protection is that they have only loaned up to (say) 70% Loan to Value (LTV). Once you're further along with many successful projects under your belt, you might feel safe to raise this to 75% or 80% - but not higher.

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Now keeping your Private Lenders protected in this manner, and working with them to ideally get 100% funding of both the purchase and rehab (and having it still be less than 70% LTV) requires that you get a great deal on a distressed property. You need to get a deal so great that your purchase price and worst case proposed rehab budget are less than 70% of the likely After Repair Value (ARV). Otherwise, you'll likely have to fund the rehab out of pocket.

For example, if you were seeking Private Lender funding for a purchase of $120,000 with another $20,000 needed for rehab, this property would need to have an After Repair Value (ARV) of no less than $200,000, of which 70% of this amount is the $140,000 your Private Lender would be funding for the deal.

And in this scenario, when the job is done, if you're keeping it as a rental or otherwise wish to avoid paying increased taxes for a short-term hold, you may have to own it for a full year first - because of the seasoning requirement. But then you can refinance this property at up to 75% of the ARV. So you refinance for $150,000, pay back the $140,000 you borrowed, along with interest. And let's say your borrowed at a rate of 6%, your interest owed would be $8,400 for the year. So you'd repay $148,400.

So that's a lowly profit of only $1,600 on the job (I've done much better), and technically you're not even making that much, because excluding any rental income made during the year (let's say it took you 2 months to get it rehabbed and rented, and so you have 10 months of rental income) - well, excluding that, in this example you've really not profited on the rehab to refi, because your closing and holding costs would almost certainly be 3 times the $1,600. But in my opinion, even this low profit (if you want to call it that) is a win, as now you own a cash-flow positive rental asset that will likely appreciate in value, it will benefit you greatly in taxes and has 25% equity present. I'll do a show coming up on all the ways you profit from owning Rental Real Estate, as most people only consider the cash-flow and appreciation - but there are other benefits that can be just as great, if not more so.

As I mentioned in Episode #14, even when I've been required to put in more cash out of pocket at the time of refi, it still turned out to be a great deal. But all of this was to tell you that you need to get an amazing deal if you want to both profit upfront from the deal and protect your Private Lender (the latter being by far the most critical requirement). Because if something goes wrong, such as your getting hit by that bus I mentioned - before the project is done. In a worst case scenario, your Private Lender has the property as their collateral (just as any Bank would) and they can either take over or foreclose on the property and sell it as-is with a Realtor to get their money back - since they're only in for 70% LTV ($140,000 on a house that is potentially worth $200,000). Surely in that scenario, with that spread - they can still come out whole or better.

There would be no shortage of flippers that would be willing to buy this house for $140,000 (or more) if it has an ARV of $200,000 - so your Private Lender is protected in the deal by never lending over 70% of the ARV. If it required more than that amount to complete the rehab, then you must be prepared to fund the shortage out of pocket. So a hard rule of working with Private Lenders should always be that you never allow them to over-fund the deal. Always protect your Private Lenders - but I'll go more into this on another show.

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I'm going to end it here, as I could talk a LOT more on this subject of Where to Get the Money. And just in talking about it up to this point, I've got several more ideas for additional shows on this and related topics. I could easily continue this show with a Part 3, but instead I'll just do new subjects for those additional shows.

I've only scratched the surface of Where To Get The Money. My point for these last two episodes was not to provide an exhaustive list anyway, but more to get you thinking along the lines of using Other Peoples Money in general, so that you'll not just dismiss the thought entirely of becoming a Real Estate Investor just because YOU don't have the money sitting in your bank account - Most investors don't. Real Estate Investing is a Team Sport.

For much more on this topic, please checkout the book from Brandon Turner of BiggerPockets.com called "The Book On Investing In Real Estate With No (and low) Money Down" - which you can find among other great Business and Real Estate books on the Podcast Website: andlandlord.com/books. Chapter 3 on Partnerships and Chapter 6 speak to what I've been saying here about working with Private Lenders. Chapter 5 on Hard Money Lenders and Chapter 4 on Home Equity speaks to what I said about these in Part 1 (Ep. #15). And Chapter 7 talks about Lease-Options, which I'll detail a few Lease-Options deals I've done in a coming episode on that topic. This was one of the first books I read when I started out, so I highly recommend it!

Closing...

Disclaimer...

When a person considers getting into Real Estate Investing, especially Rental Properties, as opposed to flipping - one of the first questions (if the thought is not dismissed before even asking it) is "Where do I get the money?". And unfortunately, most people don't even ask the question. They just make the blanket statement that "I don't have the money" or "I can't afford it" - whether it be out-loud, to someone else or just in their head.

In the book Rich Dad Poor Dad, Robert Kiyosaki mentions that his Rich Dad taught him that poor and middle class people often think in terms of "I can't afford it". While the Rich unleash the most powerful force available to man to solve a problem (their brain) by asking the question "How can I afford it" - thereby presenting a problem to their brain that it must now work to solve. Whereas just saying "I can't afford it" required no further thought on the matter. Your done, game over.

There's a way just about everyone can afford to invest in Real Estate. It may take some time and work, but are you just going to dismiss the thought or ask yourself the question and put your mind to work on a solution?

So today's Podcast is asking the question "How can I afford it". Where To Get The Money to invest in Real Estate!

Intro…

Welcome to Ep. #15 - Where To Get The Money? Using Other Peoples Money (OPM) For Real Estate Investing Success
"If you can't afford to pay cash, you can't afford it." - We've all heard these types of life lessons. I'm a Dave Ramsey listener, and he often advises that Real Estate should only be purchased with ALL CASH.

When I decided to get into Real Estate I had all these thoughts in my head and I had access to approximately $100,000. I could have listened to Dave Ramsey and others who are against any and all forms of debt - and bought one property. Maybe by my second or third year I'd have been up to 2. But instead, I used that $100,000 that was available to me to buy 4 properties within about a year and a half - and still had money left over.

I did this by using Bank loans to get 75% to 80% funding, leaving me to come up with the other 20% to 25% plus closing costs - out of my $100,000. I further funded the rehab of each property using a combination of personal funds and zero percent interest credit card promotions spanning 12 to 18 months (more on using credit cards later).

Now for the debt adverse person who follows the teachings of Dave Ramsey, this certainly sounds insane. And Robert Kiyosaki, his books speak of something he calls Financial IQ, with IQ being a measure of your ability to figure out and solve problems and Financial IQ being a measure of your ability to solve financial or money problems.

And so not to be harsh, but if you have a low Financial IQ and are not willing to do anything to increase it (I suspect you wouldn't be listening to this Podcast if that were you) - but if so, then you should do exactly as Dave Ramsey teaches and avoid all forms of debt and buy everything (including Real Estate) only with 100% cash. Putting money to work for yourself (especially other peoples money) requires a higher Financial IQ.

Now don't get me wrong… Dave Ramsey and his like teach great information (that's why I listen to them) as it relates to MOST things. But they are just flat out WRONG when it comes to Real Estate. And its easily demonstrable that they're wrong.

I shortened the intro to this podcast, as the original was too long, but listen to Episode #1 and I also used the long version in Episode #12 - where it goes on to state the many benefits of Real Estate Investing… Where someone else (the Bank) provided 80% or more of the money. And someone else (the Tenant) pays all the bills.

Real Estate is the only asset that I'm aware of where you can purchase for 20 cents on the dollar, with the other 80 cents being loaned to you at what is currently all-time low interest rates that we have today (and really for more than the last decade), that can be paid back (by your Tenants) over 30 years. You're not even the one who pays back the loan! And over those 30 years, you get positive monthly cash-flow in your pocket month after month, and the asset increases in value on average year over year. Plus you get many different tax benefits of owning the asset.

Why you would let fear of debt prevent you from getting all those benefits is just completely beyond me - so we need to understand that there is a such thing as GOOD debt… Its not all bad. Good debt puts money into your pocket, bad debt takes money out. Good debt increases your wealth, bad debt makes you poorer. Good debt (including the interest) is paid back by someone else, bad debt is paid back by you.

And with this debt, better still, as time goes on and inflation takes place, you are paying back (or actually your tenants are paying back) the money you borrowed today with dollars worth less and less over time. Imagine you borrowed $100,000 (30 years ago), back in 1989 to buy a house worth $125,000 back then. The $100,000 you borrowed back then was able to buy a lot more than that same $100,000 could buy today.

As proof, Search Google for the price of gas in 1989, and you'll see that it had just reached $1.00 per gallon. Here in North Carolina the current price of gas is like $2.55 per gallon 30 years later. So what this means is that you are paying back your loan with progressively weaker dollars than you borrowed, as those dollar buy MUCH LESS today, than they did 30 years ago. Compare the cost of food. I just went to Red Lobster (I love my seasfood) and their Ultimate Feast is now like $29.99; but when I moved to North Carolina back in 1996, it was only $19.99 - for the exact same thing. How much do you think the price of gas and food and everything else will have increased over the next 30 years?

So now I know I'm off topic here going into so much detail on debt (good versus bad) instead of WHERE to get the money, but I'm going into all this to make sure we're on the same page - that borrowing money to buy Real Estate is a GOOD use of debt. Because really, if you disagree with that, then you can stop listening, as you are certain to disagree with all of my suggestions as to where to get the money to invest in Real Estate. Because I'm going to tell you to borrow money (from a variety of sources) so that you can buy today and lock in the buying power of the dollar, but then pay back with weaker dollars from your tenants over as much as 30 years.

Because if you take out a 30 year loan TODAY, and YOUR TENANTS pay it back over the following 30 years, it is almost certain you'll be borrowing much stronger dollars than those being paid back over time. Jason Hartman (a long time Investor and Podcast host with over 1,200 episodes to his credit) calls this "Inflation Induced Debt Destruction".

In other words, inflation works towards your benefit over time, destroying your debt. He even argues that with today's low rates and the many other benefits of owning Rental Real Estate, that you are actually being PAID to borrow the money. So listen to Dave Ramsey if you want to, while I (and others who believe as I do), get rich borrowing money to buy Real Estate at all-time low rates - that is not even paid back by me (my tenants pay it back on my behalf), while I create monthly positive cash-flow and pay no taxes, because of all the tax benefits that Real Estate provides.

So of course I would consider it a financial crime to NOT leverage the benefit of what is essentially FREE MONEY to acquire a cash-flow producing asset that will likely increase in value, and provide tax benefits (why do you think Trump doesn't pay taxes on billions made - he owns Real Estate… don't get mad, get in the game! You can do that also) - it may not be a skyscraper or hotel, but a single family home or two, duplex, triplex or quad will lower (if not eliminate) your Federal and State Taxes. Then if you have a W2 job, everything taken out of your check for taxes is coming back to you - or you can lower your withholding and instantly create a raise for yourself - just by buying a rental property or two. And of course, the more you get, the greater the effect. Especially if you're following the BRRRR method that I detailed in last week's Episode #14, which is Buy, Rehab, Rent, Refinance, Repeat. Because everything you spend on the rehab is a tax deduction.

So this was all just a long-winded way of saying that the all cash (no debt) method of handling finances just does not apply to Real Estate. In fact, with Real Estate its just the opposite. Your returns are maximized by using leverage, which is just another way of saying to use borrowed funds to create a cash-flow producing asset for yourself. So hopefully with any objections to using debt to invest in Real Estate overcome, let's get back to the original question… "Where to get the money." - Hint… It involves using debt.

So Plan-A of "Where to get the money" is always the Bank. That's how I got my first few properties and it works great getting 75% to 80% of your funds from a conventional lender (or Bank), but this assumes you have the other 20% to 25%, plus closing costs, and any needed rehab expense and whatever reserves on hand the Bank wants you to be able to show. It also assumes you have a decent credit. As the bank is likely to want to see a 680 or higher credit score. And if you're 720 or 740 or above, even better to get the best rates. And if you have some credit challenges, I'll be doing a coming episode on how to solve that problem as well.

The Bank method certainly works great if you can continually come up with your share and other portions, but eventually (if you want to keep growing your portfolio), you'll need to move on to other methods of funding your purchases. And even if coming up with your portion is no problem for you, you can only get a certain number of conventional loans (potentially per person if you're a married couple) - before your tapped out of the conventional loan options. I've heard this can be up to 10 or as few as 4 per person at various times - but I'm not sure what the current limit is.

So once that happens (if not before), you have no choice but to pursue other methods. For me, especially since I use the BRRRR method that I discussed last weeks Episode #14 (where extensive rehab may be needed) - my Plan-B (with the Bank being Plan A) was a Harm Money Lender.

A Hard Money Lender offers funding of 75% to as much as 100% of the purchase price for a property, and then up to 100% of the rehab cost as well. But its NOT cheap! Interest rates may be double what you'd pay at a Bank, and points (pre-paid interest) is also likely to be high in the realm of 2 to 4 points (sometimes even higher). This means you could easily end up paying 12% to 16% (or more) for the money, but for the right project it may certainly be worth it.

I believe I paid 11% and 3 points on my first Hard Money Loan, so I was at 14% combined. Now this came down bit by bit upon each subsequent project and now I'm at about 9.5% total on my Hard Money Loans. And the more that I put down, the better rate I get, so I often end up putting down 20%, sometimes even 25% - to get the lowest rate. And while I hate the idea of points, in this scenario I'm often working with a broker, and the points are how he gets paid. Knowing that, the points become less painful when I know that he has gotten me decent funding on multiple projects - including a new build project I'll talk about in a coming episode.

But now, Hard Money Lenders (just like Banks) want you to maintain some level of reserves. And closing costs are often inflated on top of the higher rates and points. They may also have minimum credit score requirements. So you may ask why anyone would want to use a Hard Money Lender. Well, it has to be on the right project. One that has the potential for sufficient profit to make it all worth it. But the main benefit is that a Hard Money lender will lend on a project (providing 100% of the rehab funding) that a Bank would never touch.

Banks want the home to be in near livable condition (only needs new paint, flooring and appliances maybe at most). But a Hard Money Lender will lend on properties with foundation issues and fire damage and so much more. I've gotten funding from a Hard Money Lender where two different Banks had previously refused to lend to other potential buyers of the home, so I got it at a great price - due to the upper level floor being near to collapsing into the lower level at a spot, making the home unsafe to inhabit at the time of purchase (something Banks don't like).

Further, Hard Money Lenders not only tend to be expensive, but it is always short-term funding, so you may have as little as 6 months to repay the loan in full. However, I personally would not accept a loan with a term of less than 13 months. This provides sufficient time to finish the project and refinance into conventional long-term funding after having owned (called seasoning) the property for the sometimes required 12 months to be able to then refinance at 75% of the new appraised value. All of my largest rehab projects were funded by Hard Money Lenders.

And as professional rehab lenders, it's not a bad idea to work with a Hard Money Lender - as its a second set of critical eyes to make sure that your investing in what will become a profitable deal for you. As your experience grows and you take on more complex projects, it's also not a bad idea to have multiple Hard Money Lenders on your team to compete for your business. Just note that even with that, the cost will still be higher than working with a Bank, but they will also open up the door for projects with increased profit potential. But you'll likely still need to have reserves and put some amount (like 20% to 25% of the purchase price). But I'm sure you're thinking that I don't have the 20% down, so Banks and Hard Money lenders are out!

So we've got Banks and Hard Money Lenders covered so far, but both may require you to put 20% or 25% down, plus cover closing costs and show reserves - while having a certain credit score. Now when I started that was not a problem for me, as I mentioned having access to $100,000 and I had pretty good credit. You may therefore think you do not have access to the 20% down or reserves… But you may.

Do you have an existing home with equity present? Maybe you can get a home equity loan (or even better) line of credit. I've used a HELOC multiple times to cover my down payment and/or reserve requirement. Do you have an IRA or 401K? My wife has the military version of a 401K called a TSP for Thrift Savings Plan. Twice I've used her TSP to provide the 20% down because Banks require sourcing of funds, and it was easier to make a TSP withdrawal as the source of the down payment funds, and then pay back that loan with my business funds - then to try to source the business funds directly. Banks won't typically allow down payment funds to come from a business if making a purchase in your personal name, so if you have an alternate source of funding that you can use until the transaction closes, that makes things much easier if you're self-employed and have non-W2 income like me.

And I know when you think OPM (Other Peoples Money) that you are most likely thinking Private Lenders. And sure, that is certainly where we want to get as Real Estate Investors - where we have a number of Private Lenders who stand ready to fund our details (100% purchase and rehab) with low or lower interest rates. But with the possible exception of close friends and family, it is unlikely that a Private Lender will give you a dime until you have a proven track records. I had completed several deals prior to getting my first Private Lender funding in place. Just know that OPM means ANY money leveraged to take down a deal from any source. Banks, Hard Money Lenders, HELOC, IRA/401K/TSP, and even cash value life insurance and credit cards are all forms of Other Peoples Money.

The thing you must get out of your head is that being a Real Estate Investor requires YOU to have money. It Doesn't! You see, if you want to buy $100,000 of previous metals, such as Gold, you need to have $100,000. No one is going to loan you any money to buy Gold. If you want to buy $100,000 in Stocks (unless you already own a sufficient amount of stocks that you can margin / barrow against), you need to have $100,000. No one is going to loan you any money to buy stocks unless you already own a great amount in stocks. But Real Estate is the only asset (like I said before) where you can borrow 80 cents for every dollar. So you can buy that $100,000 house with $20,000 ($25,000 counting typical costs). And I think we can all agree that it's a lot easier to figure out how to come up with $20,000 or $25,000 than it is to get $100,000. And nothing says your first house has to be that expensive. My first rental property was about $61,000 and I had to come up with $18,000 to take it down.

And I hear you - "well I don't have $18,000"… Well I didn't either when I first started talking about owning Rental Properties and being a Landlord like 20 years ago. But how are you ever going to have it - 1, 2, 3, 5 or even 10 years from now, if you do not start planning for it and taking action to that end - NOW? Hopefully you won't waste something like 15 years thinking about it like I did before I finally decided to take action. But at least I wasn't sitting around doing nothing all those years. I was already self-employed and was building my Web Hosting business, ViUX Systems, which you can find online at ViUX.com. But I wish that I had gotten started with Real Estate Investing sooner.

Now before I move on to focus on Private Lenders, let me say a bit on using credit cards for Real Estate Investing. Its risky… It dangerous… So don't just jump right out there and try this method. You need to have a HIGH Financial IQ to make it work. I have every major card you can think of, and my balance sits at ZERO for most of them, most of the time. But that fact causes them to send me 0% promotional offers all the time, in an effort to get me to use the card. Many times, it is completely FREE MONEY for 12 or even 18 months. I've had some offers go 24 or 36 months occasionally.

But sometimes there is an upfront "Convenience Fee" of 3% or maybe 5%. But even with that… 3% or 5% is not a lot to pay for access to large sums of money that are then being put to work to earn 30% or even 50% or more on a project. And since I often have to show cash reserves on-hand when working with Banks and Hard Money Lenders, using money from credit cards allows my money to remain idle in my accounts as reserves. I've even taken money from a card at 3% and then loaned it out at 12% to another investor. Why not make 9% on OPM? This is putting Other Peoples Money to work for you by profiting on the arbitrage between rates. Its what Banks do every day. It is what Hard Money Lenders do.

But of course Dave Ramsey is going to tell you to RUN AWAY from this idea and anyone suggesting it. And I would tell you the same if you don't now what you're doing and don't have the Financial IQ to pull it off. I would also tell you its stupid to jump out of a plane, but I'm likely to go skydiving at some point in my life with a professional as my guide who does it successfully every day.

If you're not over extending yourself and have the money to pay it off, then using credit cards to partially fund your projects and rehabs can be a way of increasing your profits and accelerating your Real Estate Investing growth. Further, as you complete each deal and pay off the cards, your limits will increase, interest rates will reduce (but sometimes only upon request) and the promotional offers will become better. Using your cards can have a short-term hit on your credit score as you are carrying larger balances that are near to or at your limit for that card; however, in the long-term the benefit should be overall positive to your score as your overall limits increase and percentages of utilization decreases as you move into using other forms of OPM, like Private Lenders.

One additional benefit of using credit cards (especially if you have a business like I do) is to run all your household and business expenses through one or more points credit cards. I put just about everything on my AMEX card, and I stack points each month. As a result, most of my travel is completely FREE (paid for with points). I'll eventually do a show just on this topic, called Credit Card Hacking.

OK, I've got much more to say on this topic of Where to get the money, but due to length, I'm actually going to end this episode here, and make this Part 1 of 2. I'll continue in Part 2 next week starting with and focusing on where you really want to get as a Real Estate Investor, and that's having your deals 100% funded by a network of Private Lenders. That's when you'll often get the best terms, lowest rates, low to no points and funding of 100% of both the purchase price and your rehab budget.

Real Estate Investing really becomes fun when you have Private Lenders, but it is also when you REALLY need to know exactly what you're doing, as now you have someone's hard earn money directly on the line. You don't want to be the person who loses someone's life savings - so in the next show (Part 2) - I'll not only speak about how to find and work with Private Lenders, but how to protect their money from loss and create a situation where you're doing deal after deal with the same lenders over and over again - as you make money for your investors and build a rental empire for yourself.