Financing and Money Source Evolution (How to Buy More Deals at Once)

“Borrow a million dollars, and then find a way to pay it back…”

Too Much of a Good Thing

Sometimes you get so many good things coming your way that it becomes a problem. Do you remember the times as a kid when your parents would let you eat all your Halloween candy? What happened next? Let me guess, you got sick and could think of a lot of other things you’d instead do than eat candy.

Although we weren’t sick of real estate, we were starting to get more deals than we were able to handle. It was too much of a good thing, it seemed. ALMOST. We still had dreams of tons of mini-factories producing cash flow all over Houston and appreciating at the same time. However, The problem was that we didn’t have enough cash to put these deals into long-term financing. Each house was requiring all of our cash reserves to buy, and then we’d have to leave 20% of it in the deal when we financed it a few short weeks later with a bank. Do this one or two times, and you have no bullets to buy another house; you’d only be able to afford a shack! We needed to evolve.

Evolution #1 – Borrowing from Whales (Rich Friends)

Now we realized we had a lot of rich friends. These were people just a little bit older than us who had a significant amount of capital lying around, probably in a low-interest account of some sort. After thinking it through a bit, D and I approached a few of them and offered a better deal, which was also more fun and way sexier. It was a win-win for both. For us, it was better than paying exorbitant rates for hard money, and we didn’t have to buy points either.

Here is the Loan Process We Followed

We showed our friends/lenders the house we were going to purchase, meaning we actually visited the place together. The friend would get comfortable with the idea that they were going to physically buy this house with us. They got excited, which was way better than sitting on a pile of cash earning .01% interest. Then we would agree on how much money they would lend us. Generally, it was in the neighborhood of $80,000-$100,000. We created a promissory note and then guaranteed them at least 90 days of 10% APR. Even if we flipped the house before the 90 days or got it tied down into long-term financing, we would pay them the 90 days no matter what. It usually was about 3k of interest. If we exceeded 90 days, we would continue to pay interest at 10% APR. We would also file a deed in their name, so they were totally protected. Again, we didn’t buy points of any kind. We used this method several times, and it worked great as it allowed us to use other people’s money to increase our net worth.

Evolution #2 – Interest Only Line of Credit

Eventually, we started to take on more and more deals, and we decided it would be better if we could “self-fund.”  Our local Compass Bank offered an amazing product for just such an opportunity. It was called the Star Line of Credit.  This product ended up being about a $75,000 line of credit with interest-only payments. WOW! We had just hit the mother lode. This credit was insane. They were giving us money and almost for free. Now we had access to 75k at any time we needed it. It was as simple as going online and taking the 75k, and with the click of a button, we could put it in our checking account and then write a cashier’s check against it to buy a house. The only catch with this product was that the bank only offered it to “professionals.” This included doctors, lawyers, CPAs. Luckily D was an attorney, so he qualified.  I was just a lowly IT professional, so I didn’t qualify.  However, this story has a happy ending. After about six months, I petitioned our banker, and she let me slip through, and I qualified for about 70k as well. Boom. We were now able to self-fund.

Evolution #3 – HELOC

Now we were really trying to take that quote at the beginning of this article to heart. We wanted as much capital at our fingertips as possible. Dave and I also, with the same bank, applied for a Home Equity Line of Credit (HELOC). They were running a special at the bank, and it was a no-fee loan for us, so we set up a HELOC in each of the houses, good for about another 40k each. We only use this if we are seriously cookin’ as it, of course, puts our personal residence at a little risk, but we’ve used it more than a few times when deals are raining down on us.

Armed and Dangerous with Tons of Cash

Now we were locked and loaded. At our disposal, we had enough cash to buy about three houses at once if we had to. Now our deal pipeline was ready to be unleashed. Let’s get after it and buy some more cash flowing properties.