“The Cycle” to Successful Real Estate Investing
Where to find money is the next skill that you must develop. In The Cycle, Dennis J. Henson teaches the different ways to find the money, so you can to start looking for money and making the contacts. In The Cycle the ways to find money for real estate investing range from the very worst ways to the very best ways.
Worst Way – Own Bank Account
Many people think that because they have a little money they should invest it in real estate. The truth is, you won’t be a real estate investor very long if you are going to use your own money, because eventually your own money is going to run out. Then you’ll be out of business unless you have developed the skill for where to find money. The very worst way to find money is in your own bank account.
Hard money is only a step above the worst way to find money, and a long way from the very best. Unfortunately, many real estate investors think this is the best way just because it is also the easy way. The problem with hard money is that you have to put up a great deal of money on your own just to get the deal. On a $100,000 loan you are going to have to put up about $12,000. Over a year’s time it’s the hard money people who are going to have the money.
In The Cycle, Dennis explains the only one good way to have a partner, because any other partnership is going to be expensive. When you use a partner to fund a deal, you will usually end up paying the partner a higher percentage of the profit, and keeping less for yourself. On a $100,000 deal, if your profit is $20,000, you’re going to have to give the partner about $10,000. This eats into your own profit.
Every real estate guru all talk about using partners. It is a way to get started, but it’s very low on the ladder. As your real estate investing skill improves you go up the ladder.
Mortgage loans are another type of funding real estate deals that is quite low on the ladder, mainly because it costs a lot of money. For a $100,000 loan it’s going to cost you about $5,000. Now that’s better than the other two; it’s twice as good. However, with a mortgage loan, if you sell the house after just a few months of getting the mortgage and do an early pay off, the mortgage probably won’t want to do business with you again.
Most mortgage loans now have a pre-payment penalty of about 3%. So that’s another $3000 that going to come out of your pocket. So now, you’ve spent $8000 on your mortgage. Therefore, as your skill gets better, you spend less money and you make more money.
State Banks and Credit Unions
Those are a big step forward because if you borrow money from a state bank, and you pay them back in a month, they are going to be thrilled. They will consider you a good credit risk and want to do more deals. The credit union will react in the same way. Both of these are in the business of making loans and that’s how they make their money.
It is also a lot less expensive. A $100,000 loan from a credit union or state bank may cost about $2500 to $3500, and that’s a lot better than you will find at some of the other money sources mentioned so far.
HINT: While at the bank or credit union ask them how they deal with their REOs.
The Cycle teaches you where to find free money or at least methods of funding real estate deal that will cost you very little, if any, money from your own pocket.