How To Get Funding For Real Estate Investing With No Personal Guarantees on Debt, or Reliance on Credit?
Today’s question was submitted by someone from my email list, and a longtime follower of my seminars, Sydney McCreary.
Obviously this is a subject that’s very near and dear to my heart, since I specialize in teaching people how to buy property without cash, credit, or personal guarantees.
First of all, let’s look at the way that “most” people buy property. People that are planning to invest in real estate usually start by considering bank loans. They may also consider hard money loans, or construction loans, or business credit.
In case you are unfamiliar with any of terminology so far, here’s an overview…
🟣 Personal Guarantees on Debt
A personal guarantee is what you’re doing when you “sign your name” on any loan, guaranteeing to be “personally liable” for the repayment of the loan.
That means you’re agreeing that if you can’t pay back the loan for whatever reason (i.e. job loss, medical issues, etc.), and your creditor gets a judgment against you, then that judgment could theoretically attach to (become a lien on) anything else that you own in your personal name.
And that’s what destroys a lot of people financially, because anything can happen to any of us at any time. And then your whole financial kingdom comes down like a house of cards, because you signed a personal guarantee on one or more debt liabilities.
This concept of “personal liability”, and is one of the reasons that corporations, LLCs, and other business entities were created in the first place… in an effort to try to separate personal and business assets and liabilties, so that a failure in one venture would not destroy someone financially.
So the idea of avoiding personal guarantees and liability on debt isn’t new, nor unethical, in fact it’s a smart business practice, and is practiced regularly by the rich and super-rich on a daily basis.
Since business failures and bad investments can happen to anyone, sometimes beyond their control, avoiding personal guarantees also makes it easier to pass along generational wealth.
You can avoid making personal guarantees on debt, aka “signing personally”, by avoiding doing business in your personal name.
However, having said that, I would prefer you to make some money and get a few deals under your belt first in your personal name. After that, then you can learn how to do deals under a business entity such as an LLC, Corporation, or Land Trust.
But I don’t want you to get distracted by that right now. After you finish reading this article, you can learn more about business entities for real estate investing by clicking here.
🟣 Bank Loans, Hard Money Loans, Construction Loans, and Business Credit
Most people are familiar with the idea of borrowing money from a bank to buy real estate. If you’re new to real estate investing, then you may not be aware of concerning bank loans is that much larger down payments are usually required from an investor than someone who intends to live in the house.
🟣 Hard money loans tend to be used to secure funds for purchase and rehab, when people intend to fix and flip a property. In the renovation world, construction loans are similar to hard money loans, and the terms may often be used interchangeably.
Most hard money loans will require a personal guarantee, and they will usually require that the borrower have some prior experience doing rehab projects.
🟣 Business credit is what it sounds like… credit extended to businesses that may or may not also require a personal guarantee.
From time to time I’ve seen offers advertising business credit with no personal guarantee, but every time I’ve looked into it, there’s always some kind of catch with business credit.
Now, if you’ve had a different experience with a business credit, then please let me know. I’d be curious to hear if you’ve been successful at obtaining business credit with absolutely no personal guarantee.
🟣 Hoops and Red Tape
But with any of these types of loans, typically, the lender is usually going to require you to have good credit, right? So it’s kind of a paradox that you can’t get credit unless you already have great credit. So that knocks a lot of people out of the water for a lot of reasons.
Also, usually the lender wants you to have a down payment. And it’s usually a sizable down payment.
Then there’s the requirement of having sufficient income. They’re going to calculate your debt-to-income ratio. Depending on the amount of money you make, you can only have so much debt. That’s another problem, isn’t it?
As if all of that weren’t enough, the lender may also want you to have cash reserves.
So now you’re gonna need good credit, good income, but then a lot of times, especially on hard money loans and business type loans, they want to see that you’ve already got a bunch of money sitting in the bank to cover several months expenses. So, it’s kind of a catch-22. It’s like, well, if I had a whole bunch of money in the bank, maybe I wouldn’t need to borrow the money, right? So that’s kind of tricky.
As you can see, doing business the “normal way”, there are a bunch of hoops to jump through, and a lot of red tape to cut through, in order to borrow money to get deals funded.
👉 There’s a Better Way
The bottom line is that I don’t want my business to be dependent on me having to, beg, ask, or get some 3rd party’s permission to borrow money. And I don’t want that for you either.
I wouldn’t want to be in ANY business that was dependent on being at the mercy of some bank or some loan committee…
Because I’ve learned there are other ways to make a fortune without having to be dependent on somebody else.
Remember, if you’re a real estate investor or you want to be a real estate investor, then the end goal is not to “get funding” – the end goal is to do deals. We want to be making offers on, and buying houses that we can quickly convert to cash or to residual income for cash flow.
👉 Bottom line, don’t get tripped up on funding. A lot of people get stuck on this imaginary obstacle, which doesn’t have to be an obstacle at all.
When you’re dependent on funding and asking a bank for funding, you’re trapped. You’re at the mercy of somebody else and their opinion of you, their opinion of your credit score, their opinion of your job, etc.
I don’t want you to allow somebody else’s negative opinion of your creditworthiness, or lack of ability to get funding, to become an excuse for you not to succeed!
How about we design a business that doesn’t depend on outside funding!
👉 You should learn to always buy property as if you’re broke. That way even if you “did” go broke, you never have to worry about going out of business!
And when you really think about it, rich people don’t depend on their own money, do they? They’re always finding ways to work with somebody else’s money. That’s what I’m going to talk about here.
👉 So, you don’t need funding. What you need is the knowledge to create a business that doesn’t require funding. And that’s what I’ve done. And that’s what I want for everybody who reads this to be in a position to do.
This concept goes beyond real estate investing.
I live in the United States of America, but there are so many opportunities that were once only afforded to Americans that are now available to people all over the world because the Internet has become the great equalizer.
Now people in developing countries can learn how to make money without having a lot of money. Even if you don’t know anything about real estate, whoever you are reading this today, the one thing I want you to take away from this post more than anything else is: the saying that “it takes money to make money” is simply not true.
👉 The saying that “It takes money to make money” is a myth repeated by people who don’t know any better!
What it takes to make money is knowledge and action. With the right knowledge and action, you can survive and thrive in the USA and, thanks to the internet, many other countries worldwide.
You can become wealthy, rich, and fulfill all your financial desires in the USA with real estate investing, starting with no money.
I want you to be in a position to take control of your own financial future right now.
So let’s go ahead and talk about the five ways that I buy houses without getting bank funding, hard money, or personal guarantees on debt.
✅ 1. Private Lenders
I’ve worked a lot with private lenders, but I’ll admit this is not my favorite method.
However since we’ve talked a lot already about institutional lending, with all of its required red tape and hoops to jump through, then discussing private lenders right now is a natural transition.
An alternative is to skip the institutional lenders and work with private lenders. These private lenders or private individuals are not in the business of loaning money. I want to make that clear. They’re professionals, usually they’re busy professionals, that have some money sitting in the bank.
Do you know what rates banks are paying for interest right now? People are putting billions of dollars in five year CDs that are paying embarrassingly low interest rates. At the time of writing this, I think Chase is paying .2% (that’s 2 tenths of one percentage point) or so. We’re talking WAY less than 1% interest! Like only one-fifth of one percent!
It’s not just wealthy people that make up the billions invested in these 5 year CD’s, but also white-collar and blue-collar, middle-class folks as well.
Many of these people are just busy professionals – doctors, attorneys, engineers, accountants, school teachers, janitors, truck drivers, nurses, anybody that’s making a decent wage or maybe received an inheritance or settlement of some kind.
They don’t even have to have what is traditionally perceived as a high-paying or prestigious career, so don’t make the mistake of judging people by what they do, as to whether they might be a good candidate for private lending.
What comes to mind is this guy that was working as a trash collector in Detroit. He saved up money just to send kids to college from his salary as a trash collector.
So basically, a private lender can be anybody that has managed their money and has been able to put some aside, and they would like to do something more profitable with that money than what the banks are paying them.
People will drive across town to get a fraction of a percentage point higher rate on their CD, when I can pay them several times that to buy real estate. These types of people have loaned me money to buy property, and I can pay them several times what they can get at the bank, so it’s a win-win for them.
We can work out terms that are gonna allow me to be profitable, and I can pay them several times what they’re making at the bank. It’s not even a competition.
Also when they loan me money, the loan is collateralized by real estate. so I’m buying properties at huge discounts: 50% discount, 60% discount, 70% discounts. So their money is very, very protected.
They have a lien against the property that I’m buying. So, God forbid, if something were to happen and I couldn’t pay them, they could take my property. They have total legal protection.
They’re getting property insurance against the property, in the case of a loss or a fire or something like that. Pretty much this is a very low risk situation for them. And they’re getting highly rewarded with the interest rate relative to what they could get at the bank.
Now, if I’m borrowing money from a private lender, that’s going to be either because I’m going to fix and flip it, or because I’m going to keep it as a rental property.
Usually, I’m doing a five-year term with my private lenders, so that needs to be money that they’re not going to need for five years, right? Because I’m looking at money that they would normally put into a five year CD.
It could also be somebody that has an IRA that they’re not using, maybe from an old job, or it could be a 401k from an old job. I can show them how they can leverage that money as a real estate loan to an investor like myself, or even how to do their own real estate investing. But if they want to be a passive investor and just collect money on interest, I can show them how to do that.
So again, I’m gonna use money from private lending if I’m going to do a fix and flip or if I’m going to keep it as a long-term rental property.
With long-term rental property, you need rates that are low enough for the property to cash flow. This is why I don’t advocate people going out there and borrowing money at exorbitant interest rates. Definitely not for long term rentals. That doesn’t make any sense.
In any event, we always want to make sure that everybody’s in a very safe position, and you only borrow money from people that they can afford to lose the amount they’re investing.
Whether it’s the stock market, cryptocurrency, real estate, whatever, ideally no one should ever invest money that they can’t afford to lose, especially as a passive investor.
Also, I don’t recommend that new investors who don’t know what they’re doing go out and start borrowing people’s money.
I recommend that you get involved with private lenders as a real estate investor only AFTER you’ve established yourself with a few “other” types of deals under your belt, and and have expanded your knowledge of real estate investing.
What types of “other” deals can you do without getting funding from institutional lenders OR private lenders? Well I’m glad you asked…
✅ 2. Wholesaling
Wholesaling is kind of the opposite of fixing and flipping. Wholesaling is flipping WITHOUT fixing.
With wholesaling, I can buy a property and sell it on the same day. Theoretically, I’m closing two transactions at the same time. In that scenario, I can arrange it so that I don’t need funding because my funding is coming from my buyer.
What I just described is called an “Assignment Closing”.
There are also “Double Closings”, in which 3rd party “transactional funding” may, or may not be required to facilitate this one-day transaction.
Transactional funding can and should be arranged by a private lender if necessary to do the double closing deal. That way if something goes wrong… i.e. your Buyer doesn’t show up… then you can take a few more days or weeks to sell the house, or fix it up and sell it, or even convert it to a rental property or another one of the exit strategies I’ll be discussing in this article.
These properties for wholesaling are usually in disrepair, but they don’t have to be.
Let’s say that I’m buying a property that would be worth $200,000 after it’s fixed up.
And let’s say that it needs about $30,000 in repairs.
And let’s also say that I got a contract to buy this property for $120,000.
Now that I’ve got it under contract for $120,000, I can sell (or assign) the contract to another investor, and maybe collect $10,000 or $20,000 up front from my Buyer. So there’s no money out of my pocket. I’m collecting $10,000 or $20,000 because I have found an undervalued asset.
That’s the whole key: I found an undervalued asset, and then I could sell that asset and make $3,000, $5000, $10,000, $20,000, or more… on the same day that I buy the property, I sell it, I’m out, I’m done.
I get in, I get out, and I get paid.
There are a lot of gurus teaching wholesaling, because it’s a very simple concept to understand. Of course as with most things in life, it’s easier said than done. But the important thing is that the deal begins with an undervalued asset.
If you have an undervalued asset, you just need to find somebody who is willing to pay you a higher price. You know you’re not selling it at top dollar.
All right, let’s just look at some numbers…
So the After-Repaired Value (ARV) is $200,000, and it needs $30,000 in repairs, right?
$200k minus $30k, that takes us down to $170k.
I’ve got it under contract for $120,000. If I want to sell it to somebody else and make $10,000, that means that I have to sell it for $130,000.
That leaves a difference of $170k minus $130k, which gives us $40k.
That means the guy that bought it from me is making about $40,000 and I’m only making $10,000. I’m perfectly happy with that, because I don’t have to do any of the extra work he has to do to earn his $40k.
He’s doing all the renovation either himself, and/or he’s hiring, firing, and managing contractors to get it done. He has construction and project management responsibilities for 1 or more months, whereas I don’t.
If I don’t sell it to him, how much could I make? If he’s making $40k, and I’m making $10k, then that means that I could actually make about $50k if I decided to stay in the the project and do it myself.
So that’s what happens with Wholesaling. The Wholesaler makes a business decision to take a smaller, quick profit for doing relatively little work, while passing on the bulk of the profit to the Rehabber or Landlord who will do additional work to earn their larger profit.
I’ve done a lot of rehabs and fix and flips where I’ve been the guy collecting the bigger check, and I’ve made a fortune doing that, so honestly I can go either way… but I personally prefer Wholesaling since it’s faster and easier.
✅ 3. Lease Options
This is another method I use which helps me avoid the need for funding or personal guarantees.
With this method, I’m going to lease a house from the Seller, and then I’m going to turn around and sublease the house to somebody else.
This is a way that I can build up residual, monthly, passive income.
I’m also making money upfront from the person that I’m subleasing to, because they’re going to give me a sort of down payment. We call it a nonrefundable option consideration (NROC).
This person that I’m subleasing to is called a Tenant/Buyer.
Remember, this is a house that I don’t own.
Another word for this is Sandwich Leasing.
I’m leasing it from one party, and then I’m subleasing it to another party. I’m the guy in the middle. That’s why it’s called a sandwich. I’m like the peanut butter and the jelly. And the person I’m leasing it from is like one side of the bread, and the person I’m leasing it to is the other side of the bread.
So I’m coming in the deal like a tenant, but I’m controlling the property as if I’m the owner.
I’m collecting NROC up front.
I’m paying my seller a lower amount of rent, and I’m collecting a higher amount of rent from my Tenant/Buyer.
I also have a price at which I can buy the property from the seller. And then I have another price at which I can buy it if I can sell to my Tenant/Buyer at a higher price.
So, I’m making money three ways.
For this method, and the next two methods in the upcoming sessions, you’ll notice that I have 3 ways to make money on these deals.
Whereas with Wholesaling or Fix And Flip deals, there’s only one payday.
✅ 4. Subject-To, Getting The Deed, or Taking Over Payments
Most people have a mortgage on their property. Maybe they get in a situation where they can’t afford to pay their mortgage anymore, or they need to move. Maybe they’ve already moved and now they have two houses.
I can come in and take over their payments. I don’t need to get a new loan, because they already have a loan on the property. I just take over the existing loan that they have on the property and continue making payments, wherever they left off.
That’s where the term “Subject To” comes in, because I’m buying the property “subject to” the existing financing (i.e. the existing loan is staying in place, unchanged).
Ideally the existing mortgage payments should be low enough so that I can rent the house out and make a monthly payment spread.
Most likely, I’m gonna go use the same exit strategy that I used on the Lease Option method: I’m going to collect money upfront from my Tenant/Buyer, and make money on the monthly cash flow, I’m going to sell it to them at a higher price than I paid the seller. So again, I’m making money three ways on these deals.
✅ 5. Seller Financing
Seller financing is when I can literally negotiate whatever kind of deal I want with the seller that the seller will agree to.
Once again of course, my goal is to structure the deal so that it doesn’t involve any money coming out of my pocket at any time, thus eliminating the need for me to “seek funding” or make any personal guarantees on debt.
Now if the deal is juicy enough, I could possibly come up with some down payment money on a seller financing deal or taking over payments deal.
If there’s a huge amount of equity in the deal, I might be tempted to come up with some money, which I would more than likely get from a private lender (which I’d prefer to do before ever using my own cash).
One form of Seller Financing that’s know in many states is called a Land Contract, Contract for Deed, or Agreement for Deed. In my state, Ohio, we call it a Land Contract.
A land contract is kinda like buying a car, because the title transfers when it’s completely paid off.
When I buy the property from the seller, instead of going to the bank to get a loan, the seller is going to become my bank.
I’m going to work out everything with them… we’re going to work out what the monthly payments are going to be, what the price is going to be, and what the down payment is going to be – which in my case the down payment is usually going to be zero.
All that’s worked out between me and the seller. I don’t need to go to the bank and jump through all their hoops, and cut through all their red tape.
I’ll make the best offer to the Seller I can, and it’s got to be win-win… meaning it’s gotta be a win for me, and it’s got to be win for the seller. If the deal doesn’t work for both of us, it’s not going to happen.
I want the seller to be able to sleep peacefully at night, 100% comfortable with their decision, and I have to be able to make some money.
If we can’t make money as investors, then we don’t have any money to finance my dreams and to be able to have a positive impact on other people’s lives.
So, with seller financing the seller is going to become a bank. Instead of a Land Contract, it might come in the form of a Promissory Note and Mortgage.
Given my choice, I will use a Note and Mortgage rather than a Land Contract, because a Note and Mortgage gets me the deed immediately, rather than having the deed delivered later under a Land Contract.
It all depends on whatever the Seller feels more comfortable with, because I can make the same amount of money either way.
Just for the sake of discussion, let’s say the seller wanted a down payment, and I was willing to give him one. And let’s say the down payment was going to be $9,000.
If the bank tells me they need $9,000 down, then I have to have that $9,000 right now.
But in the example of Seller Financing, if they want $9,000, I could say okay, I’m gonna give you…
$3,000 now
and another $3,000 six months from now
and the final $3,000 a year from now
I could offer to break up the down payment into two, three, or more phases.
You can’t do that with Chase Bank. You can’t do that with Bank of America. But you can do that with the seller because it’s just whatever you guys agree to.
Recap / Conclusion
Remember what I said about how you need to change your mentality about funding? You don’t need institutional funding, nor do you need to personally guarantee any institutional debt.
If you ever “do” need funding, then you need to learn how to cultivate private lenders so you don’t have to deal with banks and hard money and all that crap.
Don’t my methods of buying houses sound a heck of a lot better than going to the bank and begging them for money, and having to give them a blood sample, urine test, and sign away your firstborn?
I want you to be in a position where you don’t have to beg anybody for money, but instead you can create money with your knowledge, skill, and abilities.
So just to recap, I’ve just covered my five favorite methods which allow me to buy an unlimited amount of houses without being dependent on banks, hard money, or making personal guarantees on debt.
And I do this through…
✅ 1. Private Lenders
✅ 2. Wholesaling
✅ 3. Lease Options
✅ 4. Getting the Deed (aka Subject To, aka Taking Over Payments)
✅ 5. And Seller Financing
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Today’s question was submitted by someone from my email list, and a longtime follower of my seminars, Sydney McCreary.
Obviously this is a subject that’s very near and dear to my heart, since I specialize in teaching people how to buy property without cash, credit, or personal guarantees.
First of all, let’s look at the way that “most” people buy property. People that are planning to invest in real estate usually start by considering bank loans. They may also consider hard money loans, or construction loans, or business credit.
In case you are unfamiliar with any of terminology so far, here’s an overview…
🟣 Personal Guarantees on Debt
A personal guarantee is what you’re doing when you “sign your name” on any loan, guaranteeing to be “personally liable” for the repayment of the loan.
That means you’re agreeing that if you can’t pay back the loan for whatever reason (i.e. job loss, medical issues, etc.), and your creditor gets a judgment against you, then that judgment could theoretically attach to (become a lien on) anything else that you own in your personal name.
And that’s what destroys a lot of people financially, because anything can happen to any of us at any time. And then your whole financial kingdom comes down like a house of cards, because you signed a personal guarantee on one or more debt liabilities.
This concept of “personal liability”, and is one of the reasons that corporations, LLCs, and other business entities were created in the first place… in an effort to try to separate personal and business assets and liabilties, so that a failure in one venture would not destroy someone financially.
So the idea of avoiding personal guarantees and liability on debt isn’t new, nor unethical, in fact it’s a smart business practice, and is practiced regularly by the rich and super-rich on a daily basis.
Since business failures and bad investments can happen to anyone, sometimes beyond their control, avoiding personal guarantees also makes it easier to pass along generational wealth.
You can avoid making personal guarantees on debt, aka “signing personally”, by avoiding doing business in your personal name.
However, having said that, I would prefer you to make some money and get a few deals under your belt first in your personal name. After that, then you can learn how to do deals under a business entity such as an LLC, Corporation, or Land Trust.
But I don’t want you to get distracted by that right now. After you finish reading this article, you can learn more about business entities for real estate investing by clicking here.
🟣 Bank Loans, Hard Money Loans, Construction Loans, and Business Credit
Most people are familiar with the idea of borrowing money from a bank to buy real estate. If you’re new to real estate investing, then you may not be aware of concerning bank loans is that much larger down payments are usually required from an investor than someone who intends to live in the house.
🟣 Hard money loans tend to be used to secure funds for purchase and rehab, when people intend to fix and flip a property. In the renovation world, construction loans are similar to hard money loans, and the terms may often be used interchangeably.
Most hard money loans will require a personal guarantee, and they will usually require that the borrower have some prior experience doing rehab projects.
🟣 Business credit is what it sounds like… credit extended to businesses that may or may not also require a personal guarantee.
From time to time I’ve seen offers advertising business credit with no personal guarantee, but every time I’ve looked into it, there’s always some kind of catch with business credit.
Now, if you’ve had a different experience with a business credit, then please let me know. I’d be curious to hear if you’ve been successful at obtaining business credit with absolutely no personal guarantee.
🟣 Hoops and Red Tape
But with any of these types of loans, typically, the lender is usually going to require you to have good credit, right? So it’s kind of a paradox that you can’t get credit unless you already have great credit. So that knocks a lot of people out of the water for a lot of reasons.
Also, usually the lender wants you to have a down payment. And it’s usually a sizable down payment.
Then there’s the requirement of having sufficient income. They’re going to calculate your debt-to-income ratio. Depending on the amount of money you make, you can only have so much debt. That’s another problem, isn’t it?
As if all of that weren’t enough, the lender may also want you to have cash reserves.
So now you’re gonna need good credit, good income, but then a lot of times, especially on hard money loans and business type loans, they want to see that you’ve already got a bunch of money sitting in the bank to cover several months expenses. So, it’s kind of a catch-22. It’s like, well, if I had a whole bunch of money in the bank, maybe I wouldn’t need to borrow the money, right? So that’s kind of tricky.
As you can see, doing business the “normal way”, there are a bunch of hoops to jump through, and a lot of red tape to cut through, in order to borrow money to get deals funded.
👉 There’s a Better Way
The bottom line is that I don’t want my business to be dependent on me having to, beg, ask, or get some 3rd party’s permission to borrow money. And I don’t want that for you either.
I wouldn’t want to be in ANY business that was dependent on being at the mercy of some bank or some loan committee…
Because I’ve learned there are other ways to make a fortune without having to be dependent on somebody else.
Remember, if you’re a real estate investor or you want to be a real estate investor, then the end goal is not to “get funding” – the end goal is to do deals. We want to be making offers on, and buying houses that we can quickly convert to cash or to residual income for cash flow.
👉 Bottom line, don’t get tripped up on funding. A lot of people get stuck on this imaginary obstacle, which doesn’t have to be an obstacle at all.
When you’re dependent on funding and asking a bank for funding, you’re trapped. You’re at the mercy of somebody else and their opinion of you, their opinion of your credit score, their opinion of your job, etc.
I don’t want you to allow somebody else’s negative opinion of your creditworthiness, or lack of ability to get funding, to become an excuse for you not to succeed!
How about we design a business that doesn’t depend on outside funding!
👉 You should learn to always buy property as if you’re broke. That way even if you “did” go broke, you never have to worry about going out of business!
And when you really think about it, rich people don’t depend on their own money, do they? They’re always finding ways to work with somebody else’s money. That’s what I’m going to talk about here.
👉 So, you don’t need funding. What you need is the knowledge to create a business that doesn’t require funding. And that’s what I’ve done. And that’s what I want for everybody who reads this to be in a position to do.
This concept goes beyond real estate investing.
I live in the United States of America, but there are so many opportunities that were once only afforded to Americans that are now available to people all over the world because the Internet has become the great equalizer.
Now people in developing countries can learn how to make money without having a lot of money. Even if you don’t know anything about real estate, whoever you are reading this today, the one thing I want you to take away from this post more than anything else is: the saying that “it takes money to make money” is simply not true.
👉 The saying that “It takes money to make money” is a myth repeated by people who don’t know any better!
What it takes to make money is knowledge and action. With the right knowledge and action, you can survive and thrive in the USA and, thanks to the internet, many other countries worldwide.
You can become wealthy, rich, and fulfill all your financial desires in the USA with real estate investing, starting with no money.
I want you to be in a position to take control of your own financial future right now.
So let’s go ahead and talk about the five ways that I buy houses without getting bank funding, hard money, or personal guarantees on debt.
✅ 1. Private Lenders
I’ve worked a lot with private lenders, but I’ll admit this is not my favorite method.
However since we’ve talked a lot already about institutional lending, with all of its required red tape and hoops to jump through, then discussing private lenders right now is a natural transition.
An alternative is to skip the institutional lenders and work with private lenders. These private lenders or private individuals are not in the business of loaning money. I want to make that clear. They’re professionals, usually they’re busy professionals, that have some money sitting in the bank.
Do you know what rates banks are paying for interest right now? People are putting billions of dollars in five year CDs that are paying embarrassingly low interest rates. At the time of writing this, I think Chase is paying .2% (that’s 2 tenths of one percentage point) or so. We’re talking WAY less than 1% interest! Like only one-fifth of one percent!
It’s not just wealthy people that make up the billions invested in these 5 year CD’s, but also white-collar and blue-collar, middle-class folks as well.
Many of these people are just busy professionals – doctors, attorneys, engineers, accountants, school teachers, janitors, truck drivers, nurses, anybody that’s making a decent wage or maybe received an inheritance or settlement of some kind.
They don’t even have to have what is traditionally perceived as a high-paying or prestigious career, so don’t make the mistake of judging people by what they do, as to whether they might be a good candidate for private lending.
What comes to mind is this guy that was working as a trash collector in Detroit. He saved up money just to send kids to college from his salary as a trash collector.
So basically, a private lender can be anybody that has managed their money and has been able to put some aside, and they would like to do something more profitable with that money than what the banks are paying them.
People will drive across town to get a fraction of a percentage point higher rate on their CD, when I can pay them several times that to buy real estate. These types of people have loaned me money to buy property, and I can pay them several times what they can get at the bank, so it’s a win-win for them.
We can work out terms that are gonna allow me to be profitable, and I can pay them several times what they’re making at the bank. It’s not even a competition.
Also when they loan me money, the loan is collateralized by real estate. so I’m buying properties at huge discounts: 50% discount, 60% discount, 70% discounts. So their money is very, very protected.
They have a lien against the property that I’m buying. So, God forbid, if something were to happen and I couldn’t pay them, they could take my property. They have total legal protection.
They’re getting property insurance against the property, in the case of a loss or a fire or something like that. Pretty much this is a very low risk situation for them. And they’re getting highly rewarded with the interest rate relative to what they could get at the bank.
Now, if I’m borrowing money from a private lender, that’s going to be either because I’m going to fix and flip it, or because I’m going to keep it as a rental property.
Usually, I’m doing a five-year term with my private lenders, so that needs to be money that they’re not going to need for five years, right? Because I’m looking at money that they would normally put into a five year CD.
It could also be somebody that has an IRA that they’re not using, maybe from an old job, or it could be a 401k from an old job. I can show them how they can leverage that money as a real estate loan to an investor like myself, or even how to do their own real estate investing. But if they want to be a passive investor and just collect money on interest, I can show them how to do that.
So again, I’m gonna use money from private lending if I’m going to do a fix and flip or if I’m going to keep it as a long-term rental property.
With long-term rental property, you need rates that are low enough for the property to cash flow. This is why I don’t advocate people going out there and borrowing money at exorbitant interest rates. Definitely not for long term rentals. That doesn’t make any sense.
In any event, we always want to make sure that everybody’s in a very safe position, and you only borrow money from people that they can afford to lose the amount they’re investing.
Whether it’s the stock market, cryptocurrency, real estate, whatever, ideally no one should ever invest money that they can’t afford to lose, especially as a passive investor.
Also, I don’t recommend that new investors who don’t know what they’re doing go out and start borrowing people’s money.
I recommend that you get involved with private lenders as a real estate investor only AFTER you’ve established yourself with a few “other” types of deals under your belt, and and have expanded your knowledge of real estate investing.
What types of “other” deals can you do without getting funding from institutional lenders OR private lenders? Well I’m glad you asked…
✅ 2. Wholesaling
Wholesaling is kind of the opposite of fixing and flipping. Wholesaling is flipping WITHOUT fixing.
With wholesaling, I can buy a property and sell it on the same day. Theoretically, I’m closing two transactions at the same time. In that scenario, I can arrange it so that I don’t need funding because my funding is coming from my buyer.
What I just described is called an “Assignment Closing”.
There are also “Double Closings”, in which 3rd party “transactional funding” may, or may not be required to facilitate this one-day transaction.
Transactional funding can and should be arranged by a private lender if necessary to do the double closing deal. That way if something goes wrong… i.e. your Buyer doesn’t show up… then you can take a few more days or weeks to sell the house, or fix it up and sell it, or even convert it to a rental property or another one of the exit strategies I’ll be discussing in this article.
These properties for wholesaling are usually in disrepair, but they don’t have to be.
Let’s say that I’m buying a property that would be worth $200,000 after it’s fixed up.
And let’s say that it needs about $30,000 in repairs.
And let’s also say that I got a contract to buy this property for $120,000.
Now that I’ve got it under contract for $120,000, I can sell (or assign) the contract to another investor, and maybe collect $10,000 or $20,000 up front from my Buyer. So there’s no money out of my pocket. I’m collecting $10,000 or $20,000 because I have found an undervalued asset.
That’s the whole key: I found an undervalued asset, and then I could sell that asset and make $3,000, $5000, $10,000, $20,000, or more… on the same day that I buy the property, I sell it, I’m out, I’m done.
I get in, I get out, and I get paid.
There are a lot of gurus teaching wholesaling, because it’s a very simple concept to understand. Of course as with most things in life, it’s easier said than done. But the important thing is that the deal begins with an undervalued asset.
If you have an undervalued asset, you just need to find somebody who is willing to pay you a higher price. You know you’re not selling it at top dollar.
All right, let’s just look at some numbers…
So the After-Repaired Value (ARV) is $200,000, and it needs $30,000 in repairs, right?
$200k minus $30k, that takes us down to $170k.
I’ve got it under contract for $120,000. If I want to sell it to somebody else and make $10,000, that means that I have to sell it for $130,000.
That leaves a difference of $170k minus $130k, which gives us $40k.
That means the guy that bought it from me is making about $40,000 and I’m only making $10,000. I’m perfectly happy with that, because I don’t have to do any of the extra work he has to do to earn his $40k.
He’s doing all the renovation either himself, and/or he’s hiring, firing, and managing contractors to get it done. He has construction and project management responsibilities for 1 or more months, whereas I don’t.
If I don’t sell it to him, how much could I make? If he’s making $40k, and I’m making $10k, then that means that I could actually make about $50k if I decided to stay in the the project and do it myself.
So that’s what happens with Wholesaling. The Wholesaler makes a business decision to take a smaller, quick profit for doing relatively little work, while passing on the bulk of the profit to the Rehabber or Landlord who will do additional work to earn their larger profit.
I’ve done a lot of rehabs and fix and flips where I’ve been the guy collecting the bigger check, and I’ve made a fortune doing that, so honestly I can go either way… but I personally prefer Wholesaling since it’s faster and easier.
✅ 3. Lease Options
This is another method I use which helps me avoid the need for funding or personal guarantees.
With this method, I’m going to lease a house from the Seller, and then I’m going to turn around and sublease the house to somebody else.
This is a way that I can build up residual, monthly, passive income.
I’m also making money upfront from the person that I’m subleasing to, because they’re going to give me a sort of down payment. We call it a nonrefundable option consideration (NROC).
This person that I’m subleasing to is called a Tenant/Buyer.
Remember, this is a house that I don’t own.
Another word for this is Sandwich Leasing.
I’m leasing it from one party, and then I’m subleasing it to another party. I’m the guy in the middle. That’s why it’s called a sandwich. I’m like the peanut butter and the jelly. And the person I’m leasing it from is like one side of the bread, and the person I’m leasing it to is the other side of the bread.
So I’m coming in the deal like a tenant, but I’m controlling the property as if I’m the owner.
I’m collecting NROC up front.
I’m paying my seller a lower amount of rent, and I’m collecting a higher amount of rent from my Tenant/Buyer.
I also have a price at which I can buy the property from the seller. And then I have another price at which I can buy it if I can sell to my Tenant/Buyer at a higher price.
So, I’m making money three ways.
For this method, and the next two methods in the upcoming sessions, you’ll notice that I have 3 ways to make money on these deals.
Whereas with Wholesaling or Fix And Flip deals, there’s only one payday.
✅ 4. Subject-To, Getting The Deed, or Taking Over Payments
Most people have a mortgage on their property. Maybe they get in a situation where they can’t afford to pay their mortgage anymore, or they need to move. Maybe they’ve already moved and now they have two houses.
I can come in and take over their payments. I don’t need to get a new loan, because they already have a loan on the property. I just take over the existing loan that they have on the property and continue making payments, wherever they left off.
That’s where the term “Subject To” comes in, because I’m buying the property “subject to” the existing financing (i.e. the existing loan is staying in place, unchanged).
Ideally the existing mortgage payments should be low enough so that I can rent the house out and make a monthly payment spread.
Most likely, I’m gonna go use the same exit strategy that I used on the Lease Option method: I’m going to collect money upfront from my Tenant/Buyer, and make money on the monthly cash flow, I’m going to sell it to them at a higher price than I paid the seller. So again, I’m making money three ways on these deals.
✅ 5. Seller Financing
Seller financing is when I can literally negotiate whatever kind of deal I want with the seller that the seller will agree to.
Once again of course, my goal is to structure the deal so that it doesn’t involve any money coming out of my pocket at any time, thus eliminating the need for me to “seek funding” or make any personal guarantees on debt.
Now if the deal is juicy enough, I could possibly come up with some down payment money on a seller financing deal or taking over payments deal.
If there’s a huge amount of equity in the deal, I might be tempted to come up with some money, which I would more than likely get from a private lender (which I’d prefer to do before ever using my own cash).
One form of Seller Financing that’s know in many states is called a Land Contract, Contract for Deed, or Agreement for Deed. In my state, Ohio, we call it a Land Contract.
A land contract is kinda like buying a car, because the title transfers when it’s completely paid off.
When I buy the property from the seller, instead of going to the bank to get a loan, the seller is going to become my bank.
I’m going to work out everything with them… we’re going to work out what the monthly payments are going to be, what the price is going to be, and what the down payment is going to be – which in my case the down payment is usually going to be zero.
All that’s worked out between me and the seller. I don’t need to go to the bank and jump through all their hoops, and cut through all their red tape.
I’ll make the best offer to the Seller I can, and it’s got to be win-win… meaning it’s gotta be a win for me, and it’s got to be win for the seller. If the deal doesn’t work for both of us, it’s not going to happen.
I want the seller to be able to sleep peacefully at night, 100% comfortable with their decision, and I have to be able to make some money.
If we can’t make money as investors, then we don’t have any money to finance my dreams and to be able to have a positive impact on other people’s lives.
So, with seller financing the seller is going to become a bank. Instead of a Land Contract, it might come in the form of a Promissory Note and Mortgage.
Given my choice, I will use a Note and Mortgage rather than a Land Contract, because a Note and Mortgage gets me the deed immediately, rather than having the deed delivered later under a Land Contract.
It all depends on whatever the Seller feels more comfortable with, because I can make the same amount of money either way.
Just for the sake of discussion, let’s say the seller wanted a down payment, and I was willing to give him one. And let’s say the down payment was going to be $9,000.
If the bank tells me they need $9,000 down, then I have to have that $9,000 right now.
But in the example of Seller Financing, if they want $9,000, I could say okay, I’m gonna give you…
$3,000 now
and another $3,000 six months from now
and the final $3,000 a year from now
I could offer to break up the down payment into two, three, or more phases.
You can’t do that with Chase Bank. You can’t do that with Bank of America. But you can do that with the seller because it’s just whatever you guys agree to.
Recap / Conclusion
Remember what I said about how you need to change your mentality about funding? You don’t need institutional funding, nor do you need to personally guarantee any institutional debt.
If you ever “do” need funding, then you need to learn how to cultivate private lenders so you don’t have to deal with banks and hard money and all that crap.
Don’t my methods of buying houses sound a heck of a lot better than going to the bank and begging them for money, and having to give them a blood sample, urine test, and sign away your firstborn?
I want you to be in a position where you don’t have to beg anybody for money, but instead you can create money with your knowledge, skill, and abilities.
So just to recap, I’ve just covered my five favorite methods which allow me to buy an unlimited amount of houses without being dependent on banks, hard money, or making personal guarantees on debt.
And I do this through…
✅ 1. Private Lenders
✅ 2. Wholesaling
✅ 3. Lease Options
✅ 4. Getting the Deed (aka Subject To, aka Taking Over Payments)
✅ 5. And Seller Financing
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