Drew Pitchford, from our Turnkey Rental Properties Facebook group, recently shared about the massive success he’s found in creatively financing his turnkey rental property purchases. It was so inspiring, we asked him if he would let us share his wisdom with the Hipsters!
Straight from Drew’s mouth, some creative financing tips for funding turnkey rental property purchases:
Many people never get started in real estate investing due to 1 reason: funding. The line usually goes something like “I don’t have enough cash to start investing in real estate” or “With my current credit score, there’s no way I can get a mortgage on a property.” These 2 trains of thought are bogus! With real estate, there is almost always a way to get funding!
For the real estate investor, mindset is key. I can’t think of an aspect of real estate investing where this is more true than funding. We are conditioned to think that we should never spend more money than we have, that we should pay cash for everything, and that all debt is bad.
While this is great advice for buying groceries, replacing a broken dishwasher, or buying a car, it is a sure-fire way to either slow down your real estate investing or prevent you from getting started in the first place.
So, debt can be good! There, I said it. You don’t have to be afraid of debt. It can be a useful tool for putting performing assets into your portfolio. In fact, I learned to quit thinking about money in terms of income, expense, and debt altogether! Instead, I now think in terms of assets, liabilities, and leverage. To borrow Robert Kiyosaki’s definitions: “Assets put money in your pocket. Liabilities take money out of your pocket.” So, anytime you can use a liability to purchase an asset that makes more money than the liability costs, it’s a win! This may seem basic, but it was something I had to learn before I was able to really begin building wealth. By changing my mindset about money and debt, I was able to get creative when funding my real estate purchases!
Some financing options include:
A home equity line of credit, or HELOC, is a great way to leverage the equity you have in your home to buy a performing asset. Growing up, I was taught to pay cash for everything and pay off all debt ASAP. So when I bought my house, I put 42% down and paid off the rest in 23 months. While that sounds great, in the words of one of my mentors, “You can’t eat equity!” Simply letting equity sit in your primary residence actually makes it a liability, not an asset! By taking out a HELOC, I turned my primary residence into a performing asset – one that bought 10 more performing assets!
A non-recourse loan is a private loan that is made by someone or some entity secured against an asset – in our case, a property. In the event of a default, they foreclose on the asset and take it, but it isn’t considered a derogatory account on your credit report. In terms of real estate, the only money you’d risk when using a non-recourse loan is the initial down payment you make (assuming you are letting the tenants build equity in the property for you).
It is usually easier to get a non-recourse loan because the lender isn’t interested in your income, employment history, or other assets. They are interested in the assets you are buying with their loan. And if you do default, then they take possession of that asset at a significant discount (non-recourse loans are usually 35/65 or 40/60 splits).
I actually combined a non-recourse loan with my HELOC to purchase the 10 doors I mentioned earlier. The cash flow from the properties covers the non-recourse loan payments and the HELOC payments while I still get to pocket about $150 per month! That’s the power of using equity and leverage in real estate!
Traditional Bank Loans (Mortgages)
Of course, a traditional mortgage can always be used to buy properties too. You will have to deal with all the headaches associated with bank loan approvals, but this is a great way to use other people’s money to put performing assets into your portfolio. Shortly after purchasing my initial 10 doors, I partnered with a credit union to buy 12 additional doors using traditional mortgages. Again, the rental income covers the monthly payments, and I get to pocket the remaining cash flow!
Another side to this coin: You don’t have to use a mortgage at the point of purchase. If you have the cash available up front, you can buy properties in cash, then do a cash-out refinance to pull your money out of the property and buy another. This is a core principle of the BRRRR method and yet another way using other people’s money can help you build wealth!
Hard Money Loans
Hard money loans are another type of private funding – usually at high interest rates and requiring a few points. These are a good way to get into a property, but you will probably want to refinance eventually to lower the interest rate. Unless, of course, you can pay it off quickly with cash.
Perhaps the most interesting way to buy real estate is with unsecured credit. By unsecured credit, I mean credit cards or small business loans. That’s right! You can buy properties using business credit cards! The people over at Fund and Grow can help you get business credit cards at 0% interest for 6-18 months. Just like with hard money, you’ll want to refinance the assets you buy to avoid the high interest once the 0% interest period runs out.
Despite my “cash-bashing” earlier in the article, cash is still a great way to buy properties as well. It removes the monthly payment a loan brings with it, thus increasing your cash flow. Just remember not to let that cash sit around for too long! Make your money work for you!
These Methods Work!
This all may seem far-fetched. But I know it can work because I’ve done it. In the span of 3 months, I went from owning 0 doors to owning 22! As summarized above, I used a combination of a HELOC, private non-recourse loans, traditional mortgages, and cash I pulled from the stock market to buy these 22 assets. And I’m planning to buy more this year and beyond!
Recently, I explained my journey so far to some fellow real estate investors. In short—
I had the “all debt is bad” mindset from 18-28. We put 42% down on our personal house and paid it off in less than 2 yrs. At the beginning of 2019, I “saw the light” with real estate investing and pulled 80% of the equity out of the home (recouping every dollar we put into it) to buy those initial 10 doors. Then we pulled all of our money out of the stock market and bought 12 additional doors!
Some of those fellow investors asked a few questions that I thought would be helpful to post my answers to here:
Q: For private funding, this requires a quick payoff typically, are you making improvements to the properties and getting your cash back out and repaying the lender?
A: 1 of our private loans we’re just going to pay off using extra income from our paychecks. The other is a 10 year non-recourse loan at 6.5%. So, we’ll let tenants pay it up to year 9 and refinance in the future.
Q: What about cash reserves? What sort of safeties do you have in place?
A: I have enough left over in my paycheck to handle our biggest loan payment if need be. And we have 20k set back to handle anything beyond that. The rent on the houses for the biggest loan also clear the mortgage payment by $1,500 right now and we’re in the process of raising rents on those properties so it should clear by $3,000 once that’s done. So, we have that extra money in case of vacancies. And finally, in the absolute worst case scenario, I’d “re-negotiate the debt” to borrow our President’s words.
Q: And these are all turnkey? No work done on them by you?
A: Basically, yes. Technically 10 are true turnkey. The other 12 are close but we are having to handle some minor things like replacing shingles, removing mold in a basement, and adding a railing to a porch.
Q: When did you start? This was all within the last 3 months? How much actual cash do you have in it for purchase, not including any repairs so far?
A: We formed our entities in February of 2019. Then closed on 10 doors in April of 2019. We closed on 12 doors a few months after that. All told, we have $150,000 of our own cash in the properties. The portfolio as a whole is currently returning 8% net and we expect to hit 8.5%-9% once we get rents on the newest 12 doors to market rates. Net cash on cash return is 33% right now.
Author, Drew Pitchford
Drew is a software engineer looking to retire early via passive income. Once retired, he wants to spend his days hiking all the parks in California and partnering with other investors to educate people on the power of passive income. Find him here at: bowwaterinvestments.com
Note for investors: Please do not just dive into any of these methods without proper research and understanding of how best to use them! Using leveraging, or taking out debt, without the proper knowledge can get you in trouble. Please consult with professionals before making any big leveraging decisions.
I love how you explain that debt can be good. to quit thinking of money in terms of income and expense and start thinking of it more as assets, liabilities and leverage. Very smart. I manage a landlord group as well and financing is the number one concern for new investors!
Hey Tara! Thanks for your comment, and totally agree!
If you work with a large enough turnkey provider or turnkey broker, you may be able to get lending recommendations from them — whether banks that are friendly to investors or private lenders. After a 3+ year experiment with turnkey, we have returned back to being more hands-on with our buying process. Our current PM for our turnkey purchases was able to refer a buyer for our portfolio — one example of tapping into their larger network of real estate contacts.
Absolutely agree! I managed to get non-recourse financing at a low rate (for non-recourse) through a Turnkey Company!