Transactional Funding

What is transactional funding? and when would it ever be used?

Transactional funding is hard money typically used by a real estate investor for same-day closings, also known as flash cash, back to back funding, or bridge loans.

There was a time when investors used to do simultaneous closings, but those are no longer allowed.

The benefit of doing a "simultaneous" or "same day" closing is that the end-buyer is unaware of the price the investor paid to purchase the property.

This type of closing was typically used when a wholesale investor got an off-market property under contract for a low price from a Seller. The wholesaler would then add in his assignment fee, and offer the property for sale to a rehabber or end-buyer for a larger price that included his assignment fee or profit.

If the profit was large, the wholesaler might not want to disclose to either the Seller or the end-Buyer their contractual purchase price. A simultaneous closing (in the good ol' days) would allow the investor to close on the property without using any of their own funds, as they would close that same day using the funds that the end-Buyer had wired into escrow.

When simultaneous closings are not allowed, transactional funding fulfills the same purpose: it allows a real estate investor to close on a property and re-sell it within 24 hours to another buyer at a much higher price. Transactional funding may be used to cover the investor's out-of-pocket cash closing costs.

An investor might also use transactional funding, if the end Buyer is using conventional financing, and must be listed on the purchase and sale agreement.

Transactional funding is hard money, and it is typically lent by professional money lenders. Here is a good link to a transactional funder used by Robyn Thompson students that explains the process fairly well.

So while a transactional funder may provide free Proof of Funds letters, they will typically charge points, fees or a high interest rate on a transactional loan. Be sure to ask about details, and how interest charges are computed.

Happy Investing!

Financial Leverage

Financial leverage is an essential investment tool for the savvy real estate investor. George Antone, author of The Wealthy Code and The Bankers Code, writes about financial leverage, which is, making money off of money. He will be speaking more about this at his presentation to the Real Estate Association of Puget Sound’s April meeting.

The way that most people are familiar with making money off of money is by earning interest on their savings in a bank account. Typical interest earnings on a bank account may be in the range of 0.01-1%, and on a bank certificate of deposit may be  1-2.5%. This is considered to be a fairly “safe” investment, in that it has low risk, and correspondingly low interest earnings.

Higher risk investments generally carry a higher level of interest. Private lenders may earn anywhere from 3-12% on private funds loaned to real estate investors, while hard money lenders may earn anywhere from 10-18%, along with “points.” Points are calculated as 1% of the loan amount and are typically paid by the borrower up front. Most hard money loans will have anywhere from two to five points on the loan. So a hard money loan of $100,000 would be paid to the borrower as $95,000 after paying five points. The interest is typically calculated on the full amount of the loan until repaid.

Sometimes a private money lender will borrow money to make money. For example, someone with good credit and income could take out a home equity line of credit on their house, for say, 4%. He might then lend that money as a private lender to a real estate investor for 10%, making a 6% spread on his money. Otherwise, equity in one’s home just sits there, earning 0% interest.

In sandwich lease options, a real estate investor may negotiate terms with a Seller on an owner-financed mortgage at 4% annual interest; then turn around and charge the end-buyer an interest rate of 6% simple interest, making a 2% spread on the investment.

I financed much of my commercial real estate development using credit cards with 2-4% interest for 12-18 months. I charged my development company 10% for the use of those funds, which will be paid back when the property is sold or syndicated within that time frame. I will be reimbursed with interest as an expense to the company before net profits are split with my partner. Hence, I will earn both interest and profits on my investment.

Not everyone is comfortable with the idea of interest. The east African Oromo cultural group wanted to buy my commercial property on a Seller note, but were culturally precluded from paying any interest. Needless to say, this made any potential sale to them less attractive to me.

But for those willing to learn more about financial leverage, the use of interest and debt to make money is a great option for the real estate investor to employ in his bag of creative investment strategies.

Happy Investing!

Sources of Cash

As an investor, you may be looking for quick sources of cash in order to purchase a property for future re-sale. Perhaps you are looking for cash to make the purchase, pay the down payment, or pay for fix-up costs. Whatever the issue, the speed with which an investor can come up with cash may spell the difference between getting the deal or not.

Conventional buyers rely on savings for a down payment, and then qualifying through a bank or lending institution for a conventional mortgage. But many lenders today will put a limit on the number of residential mortgages that may be held in your name. Or require a significant cash reserve, or lower debt to income ratios. This source of cash is not infinite to any investor, and the true investor will be looking for other sources of funding.

Here are just a few.

Seller financing is typically the least expensive form of financing for the purchase of real estate. The Seller may be willing to carry 80-100% of the financing, for as long a term as a conventional bank, depending on the issues surrounding the sale of their property. Typically, sellers will provide this kind of financing if it is impossible to get bank funding on a property, due to its condition or other factors; if the seller is trying to minimize their tax burden upon a sale; or simply to speed up the transaction or attract more buyers. The terms of this financing are negotiable to the buyer, and may be anywhere from 0% to whatever the market will bear.

Short-term financing will typically have the highest interest rate, as will a second- or third-lien position of the Seller behind another mortgage. Some sellers will help finance the down payment, when the Buyer can come up with a conventional loan, so this interest rate will tend to be shorter-term and for a higher rate.

Buyers may also take out a home equity loan or home equity line of credit on another property they own to come up with the cash they need for a new purchase.

Sometimes buyers will offer collateral to make up the difference needed for a down payment. This might be in the form of an automobile, boat, airplane or something else of value to the seller.

Buyers may work out installment plans, or offer to do a lease with the option to purchase later at a set price.

Many cash buyers will get hard money loans from non-bank lenders. Hard money loans are issued by professional money lenders, who usually offer terms with shorter-timeframes, higher interest rate, and lower loan-to-value ratios (requiring some skin-in-the-game by the borrower). This funding tends to be the most expensive.

Buyers may find private lenders, generally private individuals they know who are willing to lend money at a lower interest rate. Family and friends are a good source of this type of financing.

Buyers may come up with cash by doing a joint venture with the seller or another partner. Partnerships may be formal or informal, and take the form of true partnerships, limited liability companies, corporations or syndications.

Buyers who are at least 59 1/2 years of age may make withdrawals from their IRAs or life insurance policies without penalty. They do however have to pay taxes on any distributions.

Buyers may sell something else of value to come up with cash quickly, such as a car, gold or other collectibles.

There are many different ways for a Buyer to come up with cash, if they want something badly enough. Or they could broker the deal for another buyer by selling their interest for a wholesale price to another Buyer prior to closing.

Real estate investment can be enormously creative, and finding cash is not as difficult as some investors make it out to be. So get out there, and start finding property!

Happy Investing!

Private Funding for Investors

Cheap easy financing for your real estate investing deals!

https://tvallc.isrefer.com/go/vsl/WendyC

Happy Investing!