Whether you’re a new or veteran real estate investor, you have your fair share of business obstacles and challenges.
They just look different at every stage.
When it comes to funding your real estate investing business (and deals) there’s no exception.
Below is a short list of 2 such mistakes you should proactively prepare for, and avoid.
1) Focusing on deal funding, but not on raising working capital
2) Being unprepared for hard money lenders
Let’s look at both of these in a bit more depth.
#1 FOCUSING ON DEAL FUNDING, BUT NOT RAISING WORKING CAPITAL
Traditional small business owners (merchants) are very family with the concept of working capital — funds created, raised, allocated and/or saved to operate their business. These include items like marketing/advertising, payroll, overhead, supplies, inventory, equipment, and much more.
But for some reason, most real estate investors never think about this type of funding because they are so focused on DEAL-FUNDING (capital used specifically for purchasing/acquiring a property, and if applicable, the physical rehabbing process).
Creative real estate investors are dedicated to their continued education and marketing skills, and can often leverage various forms of direct response marketing to generate motivated seller leads at a cost that allows for a substantial ROI. For example, if you have the skills to launch a direct mail campaign that produces a predictable number of leads consistently and inexpensively, you can begin to “buy” customers on-demand. If that customer acquisition number is $500 and your average profit per deal is $5,000, that’s a 10X or 1,000% ROI.
How many of those $500 deals would you want to buy every month? The better question is how many CAN you buy? If you don’t have WORKING CAPITAL (which includes a marketing budget), the answer is ZERO. And you’ll have to resort to free marketing methods only (which may involve a lot more time, and chasing sellers versus them coming to you).
Creative investors also realize the benefit of leveraging Other People’s Time/Efforts, and build systems to outsource much of the menial work to Virtual Assistants and other staff members.
There is also the inevitable periods of time between deals where cash flow can get a bit tight, and access to cash in the form of working capital could be a saving grace.
Something to note, though, is that funds from hard money and private loans cannot be used as general working capital, so you’ll have to secure this type of cash from your own profits or unsecured lines of credit. Most banks will not extend a working capital loan to a real estate investment company because of the high risk factors, which is why unsecured lines of credit are ideal (most financials and loan purposes are not verified, only stated)
HOW TO AVOID THIS MISTAKE: Look into accessing Unsecured Lines of Credit through the Funding For Flipping program and its partner banks (up to $250,000 on a signature).
For more information, click HERE and enter your email address.
#2 BEING UNPREPARED FOR HARD MONEY LENDERS
This is a simple mistake to avoid. Many investors approach hard money lenders before they ever take the time to start and build a relationship with the lender. Most hare money lenders are very relationship-drive, and want to know who you are, what your skills are, and if you’re likely to be a long term client.
If you have a deal in front of you that needs to be funded in 24 hours, or you’re going to lose it, your conversation with a hard money lender, as a total stranger, is going to come across desperate.
As the saying goes, dig your well before you’re thirsty. This applies to both hard money loans and working capital. Start the process, and gain the access before you even need the money.
Ask fellow investors at your local REIA, in REI Facebook Groups, or through friends, for referrals to such lenders. Call up the lender and let them know you’d like to see if working with them would be a mutually good fit in the future.
The second major mistake in pursuing hard money loans is forgetting that you will need to prove you have the ability to cover monthly loan payments between acquisition, rehab, and closing, which could be up to a year or more. Most hard money lenders aren’t overly concerned about personal credit because they hold a lien on the subject property, but they will NOT lend you money at any rate unless they know you can pay it. So even if you are confident you’ll make $50,000 profit AFTER you flip the deal, if you have zero income going into the deal, you’ll need to find another method.
HOW TO AVOID THIS MISTAKE: Call and interview several hard money lenders in your area prior to needing capital for your next deal. If you don’t have verifiable income, consider partnering with someone who does as a co-signer on a hard money loan OR pursue a different method of funding, such as unsecured lines of credit, which do not generally require income verification.
Avoiding mistakes clears the way for us to make good decisions. It’s like playing good defense and good offense in sports. There are many other potential obstacles to overcome, but hopefully this will provide you with some ideas for getting your business, income and lifestyle to the next level!
If you would like to request more information about the Unsecured Lines of credit program, click on the colorful F4F banner below.
If you are looking to raise $50,000 to $250,000 in working capital in the next 30-60 days, we recommend you request and schedule a personal phone consultation, by clicking the green banner below.