Let's start this idea with an analysis of the benefits of real estate investment, as well as how it's funded in most cases. First we'll take a look at the needs of the real estate investor, and then we'll look at the disgruntled saver who has CDs, savings accounts, or poorly performing stocks and bonds in their investment portfolio.
- Long term rental mortgage: This isn't usually something a passive investor will be involved in, as long term mortgages are usually obtainable from major traditional lenders. However, it doesn't mean that a passive financial investment can't be the source of a mortgage.
- Wholesaling investor purchase-to-sale: This is a short term funding requirement requiring money to purchase the property and fund the closing until the sale closing, usually the same or next day, pays off this loan and rolls the property to the investor or retail buyer with new financing.
- Fix & flip investing: This is also a need for short term financing, but for more than just the purchase price of a property. The rehab must also be funded. There is a niche, transactional lending, that meets these needs, but with a high cost. There is room here for a sharp private money lender who wants to remain passive but wants a high return over a short time with manageable risk.
The Disgruntled Saver
Now we go to someone who may go their entire life and never meet an active real estate investor in a transaction. They're conservative savers who have built a nest egg and have it safely tucked away in savings accounts or certificates of deposit. They may also be investing in stocks and bonds, but they're not excited at all about their overall returns.
They would love to find a relatively low risk way to get higher returns. Now, let's say that our Saver decides to go to a local Real Estate Investment Club meeting. They're welcomed for a meeting or two without joining. Joining may be just the thing later. The point is to meet active real estate investors who are always seeking funding that works for their deals.
Now, this saver finds that they can loan a highly successful investor let's say $100,000 for three to five months to complete a fix & flip deal. If they take this money out of one of their 3% return investments for 3 months, they'll be losing around $750 in total interest.
Now, the investor is used to paying a transactional lender a base fee of $1,500 for origination and 12 % interest for the period of the loan, guaranteed by the property as collateral. Now, lets see: that's 12% for three months or $3,000 + that $1,500, so we're looking at $4,500. The investor is used to paying this and just factors it into the deal, as it's going to make a nice profit.
Now, our saver can offer a better deal to the investor, let's say $1,000 origination and 8% for the interest rate. Now our investor is looking at $3,000, saving $1,500. Our saver is getting a 12% return annualized, and they can put their money into another deal. They just got a year of savings returns in just 3 months.
This is better than a dating site. Matching up disgruntled savers with successful investors is a Win-Win for both.
Have you found success in real estate investing by implementing different approaches? Have you struggled to take that first step? Let me know what you think by leaving a comment below, or by finding me on social media: