Note: One of the biggest challenges real estate investors face is finding the money to fund those first few deals—even when they have some cash themselves. I sat down and talked with Russ Whitney, internationally known and respected leader in the real estate investment and financial training field, and here is his advice:
Jordan Taylor: I recently heard from a new investor who was buying a property at below-market value and had a 5 percent down payment, but the bank said because it was an investment, the down payment needed to be 20 percent. What would you suggest that she do?
Russ Whitney: She needs to shop around for a different lender. She probably went to a branch of a mega-bank that has very strict rules and the people in the branches do not have the authority to operate outside those rules. Another lender may look at the deal far more favorably.
What’s very important to always keep in mind is that when you take out a loan, the lender is not doing you a favor. The lender is going to make money on the deal through the interest on the loan and various other fees, such as points and closing costs. You’re the customer, and you should be treated that way.
JT: If the bank is going to make money on the deal, why do they turn down loans?
RW: Because they have to be sure they will make money on the deal. Banks make money on loans that are paid back on schedule, so they have rules and policies that are supposed to help assure that they make good loans. Unfortunately, sometimes strict rules don’t allow a bank the flexibility to work with a creative real estate investor. But just because one bank turns you down doesn’t mean you can’t get the deal funded. That’s why you need to look at other lending options.
JT: That’s easy for you to say–your name is Russ Whitney and people are probably lining up to give you money. What’s the best way for an ordinary person to do that?
RW: I recommend dealing with a good mortgage broker. Their job is to bring borrowers and lenders together, and they only get paid when the loan closes. They are a tremendous resource for real estate investors because they do all of the loan shopping for you, and the lender pays their commission. A sharp mortgage broker will help you structure the deal and then take it to the right lender.
JT: What do you mean by “the right lender”?
RW: Not all lenders are the same. They have different requirements, they like different types of deals. Traditional banks, for example, are very concerned with how much cash you’re putting into the deal and your credit rating. A hard money lender focuses on the value of the property and the loan-to-value ratio. Also, different lenders offer a range of terms. Some want the loan paid back quickly, perhaps within a year, others will go for much longer terms. The broker is also going to consider the lender’s fees and other policies, and make sure it’s all consistent with your goals.
JT: How do you find a good mortgage broker?
RW: Start by checking the yellow pages of your local telephone directory. Many brokers will advertise in the real estate classified section of the daily paper or in the weekly shoppers and real estate publications. If you’re active in your local real estate investors club–and you should be!–you’ll probably meet brokers there, or you can network with other investors to find out who they use.
Sit down with the broker and explain your investment strategy and goals. Ask if he works with lenders who want to fund the kind of deals you want to do. The broker should be enthusiastic and positive about what you’re doing–if you sense that he’s being negative, find another broker.
JT: Any other advice?
RW: Don’t give up. There is plenty of money out there to fund real estate deals. If you’ve put together a good package the way we teach, you can get it funded.