Financing for the Unfinanceable

So let me tell you a story about my first investing opportunity. The facts about the opportunity are displayed below this blog, with the price, annual income, annual expenses and other necessary information. As you can see the investment is profitable albeit only $466 a month. From my experience and knowledge regarding investing I determined that $100 a month per unit conservative profit is an appropriate investment. My goal typically for investing in a property is $200 a month per unit and $100 a month per unit is the minimum.

Now this house is technically two houses on 1 block of land, of course the previous owner subdivided the land and put a new home on it. This works well for me as it increases the income of the property.

At the time I saw this house as a major opportunity, so I performed my due diligence (Yes before any contract was made, I am not a house flipper, or money hungry guru, I do things my conventional way). It passed my inspection, it meet my criteria, it had tenants locked into contracts till the following school year (which made it more enticing as I wanted to move college students in and split rent into per room, thus increasing total rental income). With all set in place I went to my bank account and looked, and suddenly realized I am not Donald Trump I am actually I poor college student. Whoops big mistake (Of course I knew this beforehand).

What does someone with no credit, no cash or no history do to get the capital required to invest?

Here are some suggestions which I believe any college student or aspiring investor should look at doing:

ASK YOUR PARENTS!

Now in my situation the best scenario here would be to get my parents to finance me the $27,000 for the down payment and get the bank to finance the rest through an LLC which has my parents listed as part owners. This scenario works best because setting up an LLC allows you to protect yourself in case things go wrong and it allows multiple ownership of the loan.

Another option would be to ask your parents to finance the whole thing. Which unless your parents are extremely wealthy and believe that giving you that much capital is reasonable, this situation is highly unlikely.

The third option with using your parents is using them. Yes, using them. How? What? Huh? Ok confusing choice of words but allow me to explain. Generation Y, the youthful technology savvy, intuitive, inspirational generation! Or the idiots who have 1000 Facebook friends which are all completely useless. This is a topic for another day, but here is the basic, we have 1000 of online friends yet none of whom we can actually call upon or talk to. We have access to every single one of them 24/7 yet our parents the technology illiterate can call, email or text one of their friends and they may get back to them in a couple of days, but their response is more than a 'Sup' 'Lol' or 'Haha'. They can provide real information and knowledge; I hope you guys know where I am going with this. Let me explain using an example, my parents during some months may not be financial stable due to irregular expenses e.g. my Brothers car. So I know they have a few friends who excel in the business arena so maybe I should ask my parents to ask them, for a conversation. Yes, just a conversation, the rest is up to me to sell them my deal which they may or may not take, but the will ultimately (if you do it right) have more respect for you and look to include you in further deals. Basically a win win situation.

Seek Private or hard money loans:

This may seem like a far stretch for some but it is very possible you can find the right person to finance your deals at minimum expense to you and minimum risk. This path is a great way to build further connections. It may seem farfetched or optimistic but I personally believe every no in business is an opportunity. A no today maybe a yes in a future deal, a no today may mean you made a mistake in your calculations and your opportunity is to save face, or a no today could mean you find a better investor with more time for you. There is endless opportunity for this, but a word of caution make sure you can go with someone you can trust and if the deal is too good to be true, take note of that!

Partner with like-minded individuals:

Notice how I didn't say like-minded friends. I have many friends who do well for themselves and have the business knowledge to partner with me but I don't want to call them to ask for an investment. Why you may ask? I have seen it ruin friendships and ruin businesses. I believe it is possible to have success but you need a lot of ground rules and should remind yourself of these rules before every conversation.

Ok enough about friends; you need to find like-minded individuals who share your passion and drive. They need to be as committed as you and possibly with a little more financial backing. Like friends you need to set ground rules.

Owner Financing:

Now this is a personal favorite of mine and possibly the most lucrative form of financing. This is how you can get better returns and alleviate some risk. Some readers may have heard of owner financing, subject to or lease to own sort of financing but I am here to clear some of these up. Many 'gurus' discuss subject to financing, which is basically paying for the owner’s loan while they give you the deed to the house. But in many states in America it is illegal and as much as the 'guru's' tell you that the banks won't foreclose the house, they will! I also know that owners will not go for it and if you are dealing with an agent they may tell you to never call them again. It creates an unneeded risk and you should not attempt it especially if you are a young investor.

Owner financing is great for young investors and there are many ways to structure it. One of the ways which works well is the Owner financing the full amount with a minimum deposit. This works well because the investor can organize good financing terms and a low interest rate. However it can work the other way and the vendor could charge a high interest rate. Always ensure that you look over the deal and evaluate your different options. If you want to learn more about this form of financing ask for a blog in the comments below.

There you have it my young investor financing tips for real estate. I understand there are several other ways to finance a deal but these are a few which I believe to minimize risk and increase your potential profit.

Check out the facts below!

Property Information
Address	319 W 5th
City
Bedrooms	10
Bathrooms	5
Heat Source	Gas
Asking Price	$169,000
Purchase price	$135,500
Estimated Repairs	$5,000
Value after Repairs	$169,000
Garage	No
Laundry Room	In basement
Wiring Condition	Good
Plumbing Condition	Good
Square Footage	4028
Appraised  Value	$111,400
Section 2
Buy and Hold Cashflow
Purchase Price	$135,200
Purchase Closing Costs	$1,500
Repairs	$0
Holding Costs	$0
Down Payment	$27,000
Total Investment	$28,500
Total loan Amount	$108,200
Number of Units	4
Average rent per unit (monthly)	$700
Total Loan amount	$108,200
Interest Rate	5.00%
Term Length of loan (months	360
Interest Rate per month
Total Monthly mortgage payment	$580
Monthly Insurance	$100
Monthly Property Taxes	$254
Other Monthly expenses	$0
Total monthly expenses (no mortgage)	$354
Total monthly expenses (mortgage)	$934
Other Monthly Income	$0
Total Gross Monthly income (Rent)	$2,800
Total annual expenses (no mortgage)	$4,248
Total annual expenses (mortgage)	$11,208
Total Gross Annual Income	$33,600
Total annual Income	$22,392
Net operating income	$29,352
Cashflow per month	$1,866
Annual cashflow average	$22,392
Down Payment	$27,000.00
Annual cash flow	$22,392
Annual Cash on Cash return	120.58%
50% Rule: (Expenses/ Repairs)
Total Monthly income x 50%	$1,400.0
Mortgage Principle and interest	$580
Cashflow based on 50% rule	$820.0
Cashflow based on 50% rule (All expenses)	$466.0
Cashflow per unit (Minimum $100, Goal $200)	$116.50