PODCAST EDUCATION

11 Ways to Fund Your Next Real Estate Investment

Episode 021

John Larson and the Real Estate Cowboys talk passive income real estate investing.

Hear new episodes every Sunday morning at 8 a.m. The Cowboys talk about the 11 ways to fund your next real estate investment. Do you know all 11? Are there more to add? Let us know!

Keep the #CowboyCoffee hot while listening to John, and the Cowboys talk about how to #BeACowboy and earn passive income in real estate.

Episode Transcript

Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red-hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John.

John Larson: What’s up Real Estate Cowboys community? This is John Larson with another episode of the Real Estate Cowboys radio show. This week we’re going to talk about 11 different ways to fund your real estate deals. And so there’s a couple obvious ones on here, a few obvious ones I would say. But there’s some others that some investors are thinking outside the box to fund their real estate opportunities. Um, you know, obviously the most common one is going to be a cash purchase or finance purchase with a Fannie Mae loan. That would be one and two. Investors that are cash heavy, and want to invest cash. Maybe they can’t qualify for a Fannie Mae loan, maybe they’re retired, maybe they’re not bringing in any sort of income that can show the Fannie Mae lender that they can qualify for a Fannie Mae loan. Um, I’m a firm believer in leveraging investment properties, my friend Keith Weinhold from Get Rich Education, he’s also very big on taking advantage of the long-term fixed that Fannie Mae is able to provide you. But we all know that Fannie Mae only gives investors 10 loans each and you know, once those 10 loans are maxed out, what are your options after that? So we’re going to get into a few of those different options today. But I do have some investors, they buy cash. I do have some investors that like to do a mix of both. They’ll buy a few properties cash and then they’ll do a few properties with finance and they’ll use all the money that comes through the cash purchase because obviously if there’s no principal and interest payment involved, that’s coming out of the rental income, right? Then you’re cash flowing a pretty large amount. With my houses that I do in Missouri and Texas, I would say, you know, your average income, if you purchase property with cash, is about a thousand dollars a month net.

Um, that’s over a portfolio of, you know, low B class properties in Kansas City to, I would call A plus properties here in the Dallas area. And some of my properties in Dallas will rent for up to $2,500. So although property taxes in the Texas market are pretty high, rents are pretty high here in Dallas as well. So, some of my investors are seen as much as you know, $1,500 a month in net cash flow. And what they’re doing is they’re taking that money and they’re just rolling it right into the loan payment on the houses that they actually have loans on. And it just, you kind of compound the payoff. So for example, let’s say you purchased three houses cash, finance two, you take all the income from the three cash purchases and the little income leftover after your principle and interest payments are taken care of on your other two financed properties. And you take all that income and you start paying down the loan on one of the properties, one of the financed properties. And you just keep paying that off, paying that off, paying that off. Until finally that property, you now own, free and clear. Now you own four properties completely cash and you only have one property with a loan. So then you take all the income from the properties. And a little bit of income from the 5th property and you just continue to pay that loan down and it’s what we call an accelerated payoff. So that’s a good way to pay down the properties that you have that are financed. And so a lot of investors are taking advantage of that model. We really like to promote that model. I think that that’s great. The accelerated payoff model is what we call it. And um, so that’s, that’s a good good way. But then those are probably the two most popular ways that investors are funding their real estate opportunities.

Now when you get into commercial real estate and things like that, the loans are a little bit different. You’re going from more of an alternative finance loan. You’re going for a commercial loan, so you’re not truly getting that Fannie Mae finance. Um, and that would be an additional way, a third way that you can fund a real estate deal. And that would be with a hard money loan, and hard money loans are basically it’s funding that is available using a secured asset. The secured asset can be the property that you want to invest in or can be a property that you already own. Hard money lenders typically take up where conventional lenders like banks leave off because, like I said, every investor, you will get, every person in America gets 10 Fannie Mae loans. Many investors are using one of those ten to buy their personal residence and they have nine left over. I think if Keith Weinhold was on the show today we would both agree, max out those nine loans, by single-family properties or buy up to four unit properties which Fannie Mae will lend on. Um, and what are the most significant benefits of a hard money loan is that you can get financing for the after repair value of the asset versus the actual value which banks calculate their loan offers. Another significant benefit of hard money loans, you can put less, uh, put down less of your own money. The third benefit is that hard money loans can be funded in as little as a week or two weeks. Uh, in my experience, I use a lot of hard money lenders on my acquisition side, also on my retail flips. Most of the time you’re gonna have to go with a hard money loan or some sort of alternative finance when you’re doing your fix and flips on your own because Fannie Mae is not going to loan on properties that are not in livable condition.

So you’ll see a lot of investors using hard money in the retail flip game. And so yes, these can be funded in as little as a week or two weeks enabling you to offer fast closing for the sellers; which, you know, if you buy a house that’s just maybe outdated, you could qualify for a Fannie Mae loan for that property. But we all know those transactions can take 30 days, 45 days, maybe as high as long as 60 days. Usually, if you’re trying to get a good opportunity on the market, you know, all the sellers want to want you to close quickly. They want you to close with cash or alternative finance and they want that quick turnaround. So that kind of helps your purchasing power and helps give you the opportunity to get some of these good off-market deals before somebody else can.

So I know from experience that distressed sellers, you know, they want to sell as fast as possible. They all love cash offers, they all want to close quickly. So a Fannie Mae purchase might not look as attractive to that seller. And the downside would include, hard money loan is obviously a higher interest rate and the risk of losing the asset if you default on the loan for whatever reason. but a lot of times with hard money it’s going to be non-recourse finance loan, where like I said, it’s the asset that’s actually securing the money; the asset itself, not you as a person. So a lot of people, if they’re buying property within their IRA or 401K, which me personally, I think there’s better options out there, um, and if you want to buy a property cash within your IRA or 401K, I don’t mind that, although there can be some expenses associated with that, you know, deplete the IRA account if you’re not in the right market or not working with the right property management company.

So I think with single family homes within the IRA or 401K, you’re opening yourself up to a little bit more risk. Uh, whereas, you know, if you’ve been listening to the show, I really love the private money lending model from the IRA or 401K because it’s a fixed return back into the account and there is no risk of vacancy or risk of maintenance and things like that. It’s just a fixed dividend that goes back in the account. So great way to grow the retirement account. But I do know a lot of investors that do buy property. My grandmother’s one of them, uh, who buy property within the IRA or 401K, they just self-direct the account and they can now invest in things like real estate or they can loan money to real estate investment groups that are finding deals, like us and using other people’s money to purchase land and do a development.

Um, and so if you want to purchase a property within your IRA or 401K, you are not gonna be able to qualify for a Fannie Mae loan because the IRA or 401K is actually purchasing the property, not you yourself. So your IRA and 401K does not have a credit score, it’s not going to qualify for Fannie Mae financing. So really your only option at this point is to take advantage of that hard money loan. Um, and like I said, in my experience, um, you know, hard money loans, you’re going to have to put more money down. I see a lot of companies, they’ll promote, you know, 70 percent loan to value maybe is the best I’ve seen on a hard money loan. And then I, in my experience, you get down the path with a lender, and it ends up being 65 percent loan to value or something like that.

Uh, so you don’t see the very high LTV on the hard money loan. And then obviously you’re not getting the five percent, five and a half, uh, whatever it may be from Fannie Mae on the interest rate, you’re paying more so uh six percent, maybe more on a hard money loan. Um, so that’s three that we’ve gone through so far.

Cash, obviously pretty straightforward. You have cash savings, you want to purchase the property, cash great. You know, it’s still a good way to generate income that can easily, uh, that comes with a lot of write-offs, right? So you’re not going to be paying a lot of money back to the IRS if you do it the right way. You have a good CPA that’s taken advantage of the 10 plus write-offs that you have available to you. So we do have those investors, like we talked about that like to purchase cash, can’t qualify for Fannie Mae finance, don’t like the terms of the hard money loan, they have some cash laying around, they are sticking in real estate, taken advantage of the tax benefits that are available to them, the write-offs, on the income that the properties are generating. And we talked about that accelerated payoff model, which is basically a combination between purchasing cash and financing a property through Fannie Mae or financing a property through a hard money lender. That model still works. The accelerated payoff model with the hard money loan as well. Uh, can’t qualify for Fannie Mae finance? Purchase a couple of cash, purchase a couple with hard money loan, do the accelerated payoff. It’s a very, very popular tool. It’ a tool that I truly love, especially if you’re somebody that doesn’t need the cash flow right now, but you’re gonna need the cash flow in the future. Well, hey, pay your loans down> Because we all know once the properties don’t have a principal and interest payment involved, they’re all cash flowing at their highest and best.

Uh, I like to simply put it to my investors; you know five homes in the Dallas market, if you own them cash, you’re making at least $60,000 a year because I’m doing A class properties and these markets are average rents, I think are at like $1800 at this point. After all, expenses are paid each month you’re still walking away with at least a thousand dollars net. So that’s a good rule of thumb. Five Texas houses here, five A class houses. You’re making $60,000 a year. So it’s, I believe, you know, take advantage of the debt, you know, you do all that. I think if Keith was on the show, he’d probably say no, don’t pay the loans down quickly. But you know, I have seen this model work very well for our investors who go for the accelerated payoff. But it’s got to just go back to your goals, what position you’re in life. You’re a little bit older, you know, let’s say in your late forties, early fifties, mid-fifties, you could still qualify for Fannie Mae loans, do it, but also, you know, do you want to drag that loan out for 30 years? I think the accelerated payoff works great for somebody in that age group.

Uh, the next way that you can fund a real estate deal is to syndicate and uh, we have the Real Estate Guys coming into town here in Dallas. Have you listened to the Real Estate Guys radio show? if you don’t, you should. It’s a great show. And they like to do these syndication events where last year, I mean they had over 200 people there. I’m thinking this year it’s probably going to be the same amount, maybe even a little bit more. Hopefully, I’m going to be able to get on stage and talk a little bit about what we’re doing here in the Dallas market, but we’re basically syndicating money from investors.

A lot of IRA and 401k investors, um, we’re syndicating money from them, letting them play the bank on these investment opportunities and paying them back a fixed dividend into their account. And depending on what type of retirement account they have set up and have self-directed, those interest payments are going in either tax-free or tax-deferred. So it’s a very, very popular option with our IRA 401K crowd and uh, you know, it’s a very great passive model. You’re just acting as the bank. Um, like I said no one’s calling you, telling you, oh, your property is vacant or you know, oh, your property needs a new roof so I need you to send me a check for $4,000. It’s just a really great way to just continue to grow your retirement account in a very passive manner. You just want to make sure that you’re investing the money in the right market. There’s some markets out there that I think would be a little bit more risky when it comes to developments. The reason why we love Texas so much, the reason why we love Dallas so much is because there’s so many people moving here and some new jobs moving here. And I just don’t see that slowing down anytime soon. Too many jobs in the real estate market, it’s still very affordable here. And we still have a lot of land to continue to grow to support, uh, you know, build the infrastructure to support the type of, the amount of people that are moving into this market. And so with syndication, you know, lots of other people are in the same position as you. They are passionate about wanting to invest in real estate but short on funds to solve this problem. They form real estate syndicates. A real estate syndicator is a group of investors who pool their money to invest in real estate.

They share ownership and profits as part of a formal organization. Real estate syndicates are also sometimes called real estate clubs. You can join an existing syndicate or form your own made up of friends, you know, colleagues, family members in real estate syndicate. One or more key parties usually acts as the sponsor and contribute the majority of the work that makes the project lucrative in exchange for a higher percentage of return. So by letting our investors be the bank on these deals, we’re typically paying them double-digit returns in the form of interest payments, dividends that go back into the account; they don’t share in on the equity on these particular deals, they’re just coming in on a debt position, uh, but it’s become a very, very popular option among our, our crowd. A very, very popular in the real estate guys also seem like they’re just getting more and more into syndications and more and more networking and putting the right people together and pooling money together to do larger projects.

And so yeah, it’s really exciting. It’s something that we’ve added to our business and it’s been running really good thus far. Uh, last year I think I mentioned, you know, we raised our first $2.2 million for one of our first deals in South Lake Texas, which, you know, South Lake is great area, top 10 wealthiest cities in the entire U.S. Average household income is $200,000 in that area and it’s growing like crazy. So we have another deal that we’re presenting right in the same office park. It’s purchasing a lot and building an office building in this office park, which will be a total of seven buildings. Uh, we’ve already had three of the lots out of those seven lots presold. Uh, we’re doing another one right now and so we’re opening that up to our investors as we speak, uh, to come in and play the bank on that one too. I believe the term is going to be 18 months. You’re going to get double-digit returns. Um, so if you do not have a self-directed IRA or 401K, I recommend you get one and start dabbling in some private lending. I’m going to promise you right now, it’ll be one of the best investment experiences and lucrative experiences that you had in investing. So definitely, definitely reach out to our team RealEstateCowboysDFW.com or AREIUSA.com to inquire about how you can get involved when we get back. I think we ran through 4 of the 11 ways that you can fund a real estate deal. We have seven more to go, but we’re going to take a quick commercial break and we’ll be back shortly.

And welcome back to the Real Estate Cowboys. This week we’re talking about 11 different ways to fund your real estate deals. Uh, we went through obviously cash, Fannie Mae Finance, hard money, loans, syndications. Next one on the list, maybe people kind of relate these, they think they’re the same syndications and crowdfunding. Crowdfunding is another; crowdfunding sites though are a little different than real estate’s syndications for one thing. There may be no minimum investment requirement or it may be very low compared to other real estate investment requirements for our syndications, we usually like to make a minimum requirement of at least $50,000, many times that it’s going to require some sort of approval. Most of our investors are coming in somewhere around 100,000. Uh, we would be willing to take a little bit less than that. We’ve just got to get approval on that one. Um, but you know, I like to limit the amount of people that I have as my lenders in my syndication opportunities.

Um, but with crowdfunding sites, this is correct. I mean, you can get in for maybe as little as 20,000 or 10,000. Um, it’s usually a little bit lesser requirement. Crowdfunding participants usually aren’t related to one another in any way. They needn’t be in the same club or family, real estate crowdfunding sites may or may not place limits on how many contributors you can have involved in the project. That’s another thing that we like to do on our syndications by having that minimum investment amount or we are trying to limit the amount of people we have in. Crowdfunding sites offer a wide range of real estate investments to choose from with varying return rates. You’ll see stuff on crowdfunding sites that would be, you know, a retail space development, you know, maybe a hotel. Uh, you’ll see a lot of different options.

With syndications, you’re typically looking at maybe some sort of multifamily projects, a land development. It’s a development of an office building, something along those lines, you know, and then like I said, with syndications as well, it’s going to be, your money is going to be secured with a deed of trust. Typically that’s what we’re providing. So in case of any default by the borrower, you have recourse. You can go through the foreclosure process and recruit all or most of your funds by taking over the project, finishing it out or just taking over the project and selling it off. Uh, so you have some protection there with the private lending opportunity. But crowdfunding and syndication is a little bit similar, kind of similar, but obviously some different, uh, different variables.

Uh, the next one would be REITs or real estate investment trusts. They’re government regulated corporations with investment opportunities modeled after mutual funds. So REITs real estate investment trusts will typically see, there’ll be a large portfolio of properties, maybe single-family homes, maybe commercial buildings, maybe retail space, maybe a mix of all those things were an investor can come in and contribute money and they can see a fixed rate of return on their money through real estate investment trust, uh, and, and with these trusts, you can invest money in a similar way that you would have stock or a bond and the benefits of reeds include not having to hand over large amounts of cash. The security of knowing that they’re government regulated and the security of knowing that they’re only for the most stable longterm investments versus riskier ones such as real estate flips. And trust me, we’ve talked about this before. Flips, they can go great when everything goes great, but there’s a lot of ways that they can fail. And it’s just, I’m telling you, it’s stressful, it’s a full-time job and the real estate investment trust, by investing in that, you’re just giving, you know, $50,000 or whatever it may be, for a promised eight percent return. And then obviously it’s a little less risky because it’s government regulated, so a lot of people like that real estate investment trust option.

Another way is through tax lien certificates. And so those of you that are familiar with tax lien certificates or those of you who are not, it’s basically when homeowners get behind on their property taxes. And when that happens may place a lien on the property until the back taxes are paid up. States often want the cash for those taxes now instead of waiting indefinitely for the owner to pay the taxes. So they sell the tax lien certificate to third parties with guaranteed interests. In some states, if the owners fail to pay the back taxes by a specific date, the holder of the tax lien certificate, which could be you, becomes the owner of the property. If the owner does pay back the taxes, you still win because you’ve made interest on your taxing certificate purchase. It’s a roundabout way of investing in real estate, but still viable means of making money on real property tax liens. It’s a very popular thing. Each state has their own process of regulations about tax lien certificates and you can learn about your state’s process by contacting your state government’s property tax department. This is really outside of the box thing to do, but I know a lot of people that are doing it and it’s huge. You can make a lot of money on these and like I said, if the owner does not pay the taxes, you get the property. So it’s a pretty, pretty awesome, pretty safe bet that, uh, that the owner does pay the taxes back, great. You get the interest. The owner doesn’t, you take the property. So I think that that’s a really, really smart move there for sure.

Another one, you’ll see this on Bigger Pockets and other blogs out there. This is a very popular thing. It’s called house hacking. And it’s not a new invention. People have been using this system for years to get started in real estate investing. An example of this would be buying a duplex and living in one half while you rent out the other side. This is a very, very popular thing. And it’s really smart. The rent you earn from half of the duplex will likely pay for the entire mortgage payment or at least most of it. If you want to make some money, you can purchase a distressed duplex that needs a lot of work, live in one half while you’re renovating the other half, then run out the renovated side while you continue to live in and renovate the second side. When that’s finished, sell the entire duplex and repeat the same process. It’s a rinse and repeat type of model and you can make a lot of money. It’s just about finding the good opportunities. That’s the thing. It’s really tough. I know in my market in Dallas to find good duplex opportunities that make sense for the numbers and are in neighborhoods where you would want to live, because with this house hacking model, you know, there’s some duplex opportunities in some areas, some shady or areas that I might not feel comfortable living in. And I have a daughter and family. So I need to be careful about that. But, um, you know, and also you’ll, you’ll see with duplexes, a lot of times, the ones that are in the best neighborhoods usually will have the higher yields right on paper, but we all know we talked about all this all the time, the risks that are involved with it. But if you can find a duplex that you feel comfortable living in and you are comfortable with the neighborhood, I mean house hacking can be a great, great way to make some serious cash in real estate investing.

Next would be the home equity loan or the HELOC home equity line of credit, a Heloc, um, which is, is as another way to fund a business. And I know a lot of people that are doing this right now because in today’s market you have a lot of properties with a lot of equity builds up into them. And so you see people take advantage of this Heloc. I’ve had people take advantage of the Heloc and do private lending because the interest payment that they’re paying back on the home equity line of credit is so low. And if you’re able to offer somebody double-digit returns on private lending, it may make sense for them as well, but a home equity loans are a fast and easy way to get funds you can use for real estate investing.

The only caveat is that you must have had that built up equity in your home and be willing to risk it on real estate deal. You are permitted to use home equity loan money on anything you want, including vacations, renovations, consumer products, and real estate investing. Of these, real estate investing is the most likely to get you a great return. So this is becoming more and more popular in today’s market, taking that home equity loan out.

And finally, what we have here would be a whole life insurance policy. And if you have a whole life insurance policy that has grown to exceed the death benefit, you can borrow against it to get funds to use on a real estate investment. A significant advantage of borrowing against the whole life policy is that you get the funds almost immediately with no questions asked. It’s not dependent on your credit score. The amount you’re eligible to borrow is only dependent on the amount of the policy and how much you paid for it or paid into it so far further, you can spend as much or as little as you want and monthly premiums. Just know that what you borrow comes out of what’s ultimately payable through the policy.

That’s the 11 ways that I’ve come up with here. Um, there maybe could be more, but this is the 11 that I’ve come up with, and I hope this helps people, uh, you know, that are looking to pull funds together and get funds together to start investing in real estate. I know there’s many of my listeners out there who have not even done their first real estate deal yet. Maybe they’re trying to figure out, how am I going to come up with the money to get into my first real estate deal?

Maybe you’re somebody who’s maxed out their Fanny Mae loans that are now starting to look for other ways to buy property. I hope this episode was informative and gave you some ideas on some other ways that you can get some income or get some money together to go buy some more real estate deals because this is an abundance model, and I want to help my investors and my listeners get as many properties as they can to set themselves up for a great retirement. So we’re going to take another quick commercial break. When we get back, we’re going to wrap up this week’s episode.

Hey, welcome back to the Real Estate Cowboys. John Larson here. We’re talking about 11 different ways to fund your real estate deals. Um, we finished off with the whole life insurance policy. I’m sure there’s many of you that are listening to show that didn’t know that you could access your life insurance funds to invest in something like real estate. So I thought, and I hope that you know, this would be a good episode and a good way to help investors who have maxed out their Fanny loans or a little bit tight on cash, but want to continue growing their real estate portfolios. Hopefully I was able to give you some ideas on how to do so, do some of these alternative funding options, and so I just want to kind of finish off here with letting everybody know, again, uh, the Passive Income Guide: What is Your Return on Life, that will be available on Amazon. You should be able to get that on Amazon right now. We’ll also have it on the RealEstateCowboysDFW.com website. Great book, really easy read, 65 pages somewhere around there, so pretty quick read, but it gives you some good information on why real estate, overstocks and traditional investments, seven things to consider when investing in a cash flowing property, what you need to look out for, lots of information on property management and what to look out for. Because I do believe, and any smart real estate investor will tell you, that property management is the most important part of this entire model. And so there’s a lot of good information on property management. Also some information on lifestyle investing in Belize specifically because we do believe that there’s just such tremendous opportunities in Belize. So if you like what you heard on the show today, subscribe to the podcast, visit RealEstateCowboysDFW.com. If you have not yet put in there, put in your information so you can join our mailing list. If you’re somebody who’s actively looking for good real estate investment opportunities, whether they’re single family homes or are you interested in doing the private lending opportunity for your IRA or 401K or are you interested in a vacation property?

We can provide all the information that you need through the RealEstateCowboysDFW.com website. You can put in your information and get our starter pack. Also, join our mailing list so you can get off markets and exclusive passive income, real estate investment opportunities through the Real Estate Cowboys community. Um, so thanks again for a great show and I will say, you know, with the ways that I gave you to fund a real estate investment, there are certain criteria, obligations, risks, and rewards. It’s always necessary to consult with a financial professional before undertaking a big investment. So I gave you a few different options that you can use. Hopefully, you found a few that make sense to you, but then always contact your financial professional to make sure everything’s good and you’re okay. And, uh, that’s it. Thanks for another episode. Thanks for tuning in and I’ll see you guys again next week and always remember what is your return on life.

Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial tax, mortgage or real estate advisor, as the information is not guaranteed and investment strategies have the potential for profit or loss.