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- [00:00]
A
Most rookies think you need a mountain of cash to buy your first property. But in reality, the financing strategy you choose matters more than the size of your bank account.
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B
And today we'll break down five rookie friendly ways to fund your first real estate deal in 2025. From low money down FHA loans to creative financing methods that let you bypass the banks altogether. We'll help you get your hands on the money you need to get these deals closed.
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A
This is the real estate rookie podc. I'm Ashley Kerry.
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B
And I'm Tony J. Robinson. And with that, let's jump into financing path number one, which is FHA and conventional loans. I think a lot of rookies make the mistake of hearing those loan products and assuming that those can't be used at all for properties that actually generate revenue as rentals. And while it's true for an FHA that you have to live in it, it doesn't necessarily mean that property can also generate revenue. And we'll talk about some of the strategies there. But conventional loans, those can be for traditional primary residences or you can use a conventional loan for an investment property. So there is, I think, some flexibility around these loans. Going back to the FHA example, maybe let's just actually break both of these down before we even get into the examples. When we talk fha, Ash, you always make the joke, like what, you know, what did you think FHA stood for when you first heard it?
- [01:26]
A
Yeah, I honestly thought it was like, it was only like first time home buyer, like it would have to be your first time ever buying a house to get this loan. And I thought that for a very, very long time whenever I heard fha.
- [01:37]
B
Yeah. And in reality it's not necessarily for first time home buyers. In fact, it's not. You don't have to be a first time home buyer to use this, but it's just a federally backed loan that gives you typically a lower interest rate. Three and a half percent is the most common, but there are a lot of. So the FHA loan, one of the benefits is that it comes with a lower down payment. Typically three and a half percent is what most people are quoted or why they opt to go the FHA route. But it also comes with a lot of hoops you have to jump through. And as a buyer that might not seem like that big of a deal. It's like, hey, I've got this FHA loan. But on the seller's perspective, if someone's bringing an FHA loan compared to a conventional loan, sometimes they might opt for the conventional, because it comes with less hoops. There are FHA inspections that need to be done. And, you know, if the seller's not willing to make those repairs or to bring it up to quote, unquote, code for the fha, it can cause some concerns. Conventional loans are a little bit more flexible in terms of what you can buy, right? You can buy properties, maybe wouldn't qualify for FHA financing. So when you think about conventional loans, these are the loans that still have some sort of government backing. So like, if you've heard of the terms Fannie and Freddie, those are the, the kind of quasi government agencies that are backing these conventional loans. And what happens is that a lot of these banks or lenders, they'll be the person processing your loans. You'll go into, you know, whatever Ashley Cares loan office, she'll fill out all the documentation for you. But Ashley's not keeping that loan on her book. She's actually packaging that loan up and she's giving it to Fannie and Freddie, who are then going to service that loan for you. That's, that's what we mean when we say conventional loan. There's some sort of government backing behind that. We'll talk later about some of the other loan options. But just know in general that's what we're talking about. And that's why those loans, I think are so common, because who doesn't want debt that's backed by the government, Right? Like everyone's going to jump at that opportunity. But that's also why these loans, I think, have more limitations than some of these non conventional options because they are tied to the government and, you know, they, they want to make sure that they're underwriting things in the right way.
- [03:43]
A
I think too, when you are like shopping for loans and you know, don't automatically assume FHA is like the best route to go because there are some conventional loans where you only need 5% down if it is going to be your primary residence. So make sure you ask a lender, you know, what options they have instead of just narrowing yourself down saying you want an FHA loan too.
- [04:05]
B
When we bought our first primary, we went, we had options of FHA or conventional and we went conventional. And, and I want to say it was, yeah, maybe it was 5% down. But then because we went conventional and we bought this new construction from like a large developer, they also gave us a credit which reduced our down payment by pretty much the same as it would have been if it was a three and a half percent down. So you Know, the conventional has some, some pluses and minuses there too. I think the one thing I want to call out though is that even though the FHA very clearly has the restriction that it has to be your primary residence, if you are doing something like a house hack, or either you're renting by the room in a large single family home, or if you're buying small multifamily, you can rent out that extra space and still earn income. And there's nothing that, that would prevent you from doing that simply because it's fha. And we've interviewed lots of folks on the podcast who buy homes, move into one unit and rent out the other units using fha. And it's a great low down payment way to get into these deals. And if you do that, you know you've got to live in, in it for typically, what is it, 12 months before you can go on to the next one. But say you that every 12 to 18 months. Well, now you've built a pretty big portfolio with relatively small down payments. So it is a good way for Ricky to get in even if you don't have a ton of savings built up.
- [05:24]
A
Yeah, we just had Matt Krueger on the show that he literally did this with, living a property from one year and then move on to the next, live in it for a year, add some value, and then he would rent them all out. And he's built his portfolio that way. So yeah, I think that is a great option. The thing with FHA is you can only have one of the FHA loans in your name at a time. So that's why the conventional loan is better, because you don't have to refinance. You also don't have to deal with the FHA inspection of the property. Especially if you are buying a property to add value, it may not pass FHA inspection. I remember my cousin bought a property and it failed FHA inspection because they didn't have a handrail or something going up the stairs or whatever. And the seller refused to put a handrail up to make it pass inspection. Like they were literally going to let this deal fall through. And I remember my uncle went over to the house and like got permission from the owner to go ahead and put this railing up before they even owned it, just so it would have passed inspection so they could purchase the property. So I don't know exactly what the list of rules are, but you could just go to the FHA website and see what those things are and make sure your buy box is in a Completely dilapidated property. And for if it's going to be your primary residence, it has to be livable. Like, you have to be able to move into the property within a certain amount of time after closing.
- [06:52]
B
So that's financing path number one, FHA and conventional financing path number two, partnerships. And Ash and I wrote the book on partnerships for bigger pockets. You guys can check that out@biggerpockets.com partnerships. But partnerships, I think are one of the tools that if more rookies were comfortable using, would allow them to. To get in, get their feet wet, and start learning the game. We just interviewed Sebastian Rodriguez, and this is a person who immigrated to America, speaking none of the language, no friends, no family, literally no one, and was able to leverage partnerships to go from zero to 13 doors and roughly 4,000 bucks a month in cash flow in like six years. And he did that on the back of partnerships. So there's definitely a ton of value for Rickies to learn this skill because it allows you to use the things you do have at your disposal, your time, your ability to acquire knowledge, and pair that with someone who has what you're missing, which is the capital or the ability to get approved for the loans. So rookies, I think at some point, even if you have capital to start, at some point you're going to run out. So I think being able to leverage partnerships, it's a good tool in your tool, build as you scale your portfolio.
- [08:02]
A
And if you want to learn more about partnerships, Tony and I co authored a great book called real estate partnerships. You can go to biggerpockets.com partnerships. You can even use the code. I think it's Tony 10 or Ashley 10 for 10% off. But this is actually how I started. I had no money and I found a partner to finance my first deal. So he brought all the capital to the table, and I was just going to be the one that found the deal, managed the rehab, managed the tenants, got tenants in place, and, you know, acted as the leasing agent, the property manager, did the bookkeeping, all of those things for the property. And we eventually went and refinanced and paid him back. But that. And I handled all of that too. So it was pretty passive. He did contribute by having his roommate do all of our work for us. But we were 50, 50 partners on the property. We both went to the property to, you know, look it over and things like that. But we set it up so that I would be doing most of the work and he would be the money partner. One thing is, is that you have to be careful about that because, like, if you can get into like SEC rules and regulations where if you are getting too many passive partners, you're going to start to fall under. You need to, you know, do syndications, you need to be regulated by the. Follow all of these rules and things like that. So when you bring on partners, make sure that they are contributing or have some type of role into actually, you know, running the investment. So it's an active investment for them, too. But I, I wouldn't have. I probably would have been so much longer until I would have got it started if I didn't have a partner with money. I mean, it would have taken me a long time to save up that amount of money. At the time, I think I was like making $35,000 a year and this was a $72,000 property. So I would have had to save my money for over two years and never spend a dollar of it.
- [10:13]
B
If you're someone who's new and you're thinking, yeah, Tony, Ashley, this sounds great to go out and find these people who have all these money, but where, like, where are all these people hiding here? Here's a few things that I'm going to encourage you to do first, and I'll give you both things to do digitally because I think you'd be silly not to leverage that. But I'm also going to give you things to do in person. Okay. Digitally. One of the first things that I would do is go find a community online, go join the real estate rookie Facebook group, tens of thousands of people in that group. And even if you don't have a ton of knowledge today, just simply being active and present, and you'll start to see some of the same names popping up and you'll start having conversations. And this isn't going to happen overnight, but if you, if you consistently participate over time, and when I say time, I mean months and months and months of doing this, you'll start to naturally build relationships within that group. Right. So that is a free resource. There's a high percentage that you already have a Facebook group. Go there. The bigger pockets forms another place completely free to join, participate, ask questions, provide value where you can. If you just focus on doing those two things consistently, like, hey, I'm going to jump in there every day for 30 minutes and I'm just going to see what I can add, see what value I can add, you'll eventually start to build relationships online in person, physically. I would go to your local meetup and I would just attend consistently. I Would find the person who's hosting the meetup and say, is there any way that I can provide value to you as you host this meetup? It could be logistics, like, hey, let me stand at the front door and get everyone to sign in when they get here is, hey, let me help you maybe source guests. If you want speakers to come to your meetup, let me get out there and help promote this on those Facebook groups and the biggerpockets forums that I'm so active in. But go find a local meetup somewhere and participate. And the last thing I would do is try and find the place where people with money are hanging out. Right? I was listening to someone speak, and he said one of the most interesting things when it comes to raising capital. And he said that the people who want to raise capital in real estate are going to the wrong events because they're only going to real estate events where other real estate investors are hanging out. But if you want to raise capital, go to the events where the entrepreneurs are hanging out. Go to the events where the lawyers and the medical professionals are hanging out. Go to the events where people who generate lots of income but don't have lots of time are hanging out and build relationships in those circles. Because then if you can share, hey, here's what I'm doing, here's what I'm working on, that'll naturally pique their interest. So we've had guests, you talked about joining country clubs. You know, we just had Sebastian, I mentioned earlier, who said he went to an expensive gym and that's where he met a lot of his folks. So try and identify where those folks who have the income are hanging out and just go insert yourself and provide value, genuinely build relationships.
- [13:12]
A
We. We had somebody on before too, that talked about upgrading to first class. How you're sitting next to. To somebody in. In first class. I don't like to talk to anyone. I'm playing. So that wouldn't work.
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B
That would not work for me.
- [13:27]
A
One time. One time there was. It was a shorter flight and I did talk to a guy in first class and he ended up being an insurance broker. And we ended up, you know, talking the whole time. And it was great and it was super interesting. And I went out to his office like a couple weeks later and stuff like that, and, you know, learned about his insurance company and stuff. So, like that, I can attest, like, that does work. But I have to say I'm more pretty much on my computer working or things, you know, the whole time or read lately. I've been reading books on airplanes but talking to people not my strong suit. So maybe I should practice. Maybe this will be my motivation to upgrade my next flight to first class and I can only do it if I talk to the person next to me. But I think too with before we get off the partnerships is that when you're going and meeting people and building these relationships not to have that, your main goal is to be your money partner. Make sure you're actually building valuable relationships with these people because they're going to be able to tell. They're going to be able to tell that you just want them to lend you money if you're not finding a way to actually build like a quality and genuine relationship with them.
- [14:47]
C
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- [15:25]
A
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- [16:04]
C
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- [16:40]
A
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So financing path number three is seller financing. There's a chance you have probably heard of this strategy, but seller financing is the concept where instead of going to the bank and having the bank give you the majority of the money that's needed to buy the home, the seller actually operates as the bank. So I'll give you guys an example. When we bought our hotel last year, we did not use traditional financing. We used seller financing. So the owners now have a note against the property. And instead of making monthly payments to bank of America, we make monthly payments to the previous owners. And it was a win win because they got consistent cash flow for the next, I think our notice, seven years with them or even 10 years, we've got, they've got consistent cash flow for the next decade. Right? We got to get into this asset with terms that were more favorable for us than what we would have been able to get from a bank. And it was truly a win win for everyone. So imagine being able to buy properties and scale your portfolio without ever having to go to a bank. And we didn't have to fill out the mountains and mountains of paperwork. There were no credit checks, there were no this, there were no that, there were no DTI conversations. It was just, hey, here's what we agree on. Let's make it happen. And I know lots of folks who have built their portfolio strictly on the back of seller financing, and we've interviewed lots of folks in the podcast. But I think it is a strategy that more folks should be looking at, especially right now, because there are, and you're seeing these headlines more and more, but the, the baby boomer generation is getting to retirement age many and many and many of them every single day. And as that happens, a lot of them are looking for ways to dispose of their assets that they've accumulated during their life. So because either they don't want to continue to manage it, they don't have any kids they want to pass it on to, the kids don't want to deal with it. And that's where we as the next generation can step in and provide a solution that still gives them that consistent monthly cash flow, but without the headache of actually dealing with the property on a day to day basis. And that's exactly how we got our hotel deal. Two kids had inherited this property from their, their dad who passed away. They were tired of managing it themselves. We just want to wash our hands, but we still want the cash flow. And that's how we set that seller finance deal in place.
- [20:13]
A
I actually just had an investor reach out to me and he got my business card two years ago from one of the customer service reps at the bank who helps you set up checking accounts. And she was actually one that I loved and used all the time and she ended up getting a different job. But at some point she had given my business card to another investor and said, if you ever sell, call her. And so he called, he left a voicemail. And so I gave him my email to send me more information. And in that email he, you know, gave me the, the property addresses, the, the rents, the taxes, and that he would be open to doing seller financing, that he's really trying to take advantage of the tax strategies and what he can do to not pay so much tax on the sale of the properties. And so he actually offered seller financing to me. And he's looking to retire from being a landlord and he wants to sell a couple each year until they're all gone. And so he kind of had his own plan in place and part of that plan was doing seller financing. And I thought about this and this is something that when I'm Ready to sell it all if that ever happens, is I would be very strategic like this, that I would also think about how can I get the max benefit of this instead of just selling it all, getting the cash and giving, you know, a ton of that cash away to taxes, how can I maximize that benefit? So there are savvy investors who have been doing this a long time, have learned the tax advantages, have, you know, been through it all as a landlord and maybe, you know, that our understanding of why seller financing works for them and works for you too, as the buyer.
- [22:11]
B
I think a few things to consider as you're going through seller financing. First is that I think that seller financing might actually be easier on commercial properties than it is on single family residences. And, you know, this is just my own experience. Right. I'm sure there are other folks who might contest that. But the reason I say that is in commercial, A, you're typically dealing with folks who are more seasoned investors, so they, they already understand the concept of seller financing. And B, when we talk about buying commercial real estate, one of the things that's required typically for a bank to lend on that type of asset is good bookkeeping from the current owners. And if, you know, we're dealing with some of these mom and pop owners who, you know, Ashley talked about, like the, you know, when you, you're working at that apartment complex and they just had like a sheet with a grid and everyone's name, they will put an X whenever someone paid their rent. Banks aren't gonna, they're not gonna take that. Right. So oftentimes the best way for the seller to dispose of the asset and get the price that they actually want is through seller financing because it would be too difficult for a buyer to go out and get traditional financing. So I think that there is really a big opportunity on the commercial side, but even on the single family side, I think the opportunity is there. But what I want Ricky's to think about when you consider or you are pitching the idea of seller financing to the seller, there's a few different levers that you can kind of manipulate to try and come to an agreement that makes sense. First is the price or like the actual purchase price that you agree on. Next is the interest rate. Right. Like what is the, what is the amount of return they're going to get on on this money for lending it to you? The down payment would be next you have the amortization period. Right. So how, how long are we going to stretch out this purchase price? You have any balloon payments? Right. So is it going to be due in 30 years or are we going to have some balloon payment due in 10 years? Do you have an interest only period? So there's like five or six things that you can look at and kind of piece together to make the offer more attractive to the seller. And as you have conversations, I think you'll start to understand what's most important to the seller. Like, for us, we knew that the sellers just wanted a certain dollar amount every single month. And once we had that insight, it became easier for us to put the, the deal together in a way that gave them the number that they wanted every month, but still gave us some of the other terms that would make the deal work for us. Right. So getting that insight and then being able to craft these different things together is what makes it a true win win for both you and for the seller.
- [24:57]
A
Then the fourth financing path we want to talk about is private money lending. So this is actually my dream and my goal is to sell all my properties and just be a private money lender. And if you don't pay, I'm coming with my baseball bat to break your kneecap. But I. The private money lending is going to somebody else who doesn't have the time to actually invest, but they have the capital and maybe they don't want to be involved in, you know, the actual property and be an active investor by being your equity partner. And they just want to lend the money, they want to cut the check. And then, you know, the great thing about this is there's so much flexibility in how you can structure it. So, and I was definitely, you know, I only thought when I started investing that there was private money, that there was cash and there was partners. Like, I did not even think you could go to a bank without, you know, to buy an investment property. So I think a lot of the opposite is true. Is like, I think most rookies think you can only go to banks, but. But that's not true. And of course, if you're listening to this episode and this podcast, you know that by now that there's tons of other options out there. But I think this is a great way to get started if you have somebody. Definitely a hard point, a con of this is being a rookie investor, not having experience, not having anything to back you. But I did it. I found a partner with money. You can find a lender with money. That's probably even easier than getting someone to actually partner with you on the deal. And I guess, Tony, you've done a lot more private money lending than I have. I've only had maybe three private money lenders that I've used over the course of time. But what is the best way to actually find one?
- [27:00]
B
Yeah, we, we've raised, you know, multiple millions of dollars in private money at this point in our journey. And I think before I even get into like the tactical piece of how to find someone first, just the, the mindset that a rookie needs to have. When you are looking for someone to be a private money partner, you are not asking for charity, right? Like, you're, you're, you're not, you know, graveling on the side of the street saying, please help me, please help me, please help me. That's not what this is. What you're giving them is an opportunity to get a better return on their investment. Backed by a tangible asset, right? Backed by real estate. Because if you think about what's transpired in the last couple of years, the folks who had money just sitting in a savings account, even if it was like, you know, a high yield savings account at, you know, whatever 3%, they were still losing to inflation, you know, or barely keeping pace with inflation. So if you can say, like, hey, look, I'm going to give you an opportunity to 3, 4, 5x what you're getting by leaving your money sitting in the bank, that's an attractive offer for most people. So I think first is just rewiring in your own mind what it means to enter into a partnership with a private money lender. There is no upper hand and lower hand or, you know, someone who's got the higher position in the hierarchy and someone who's lower. You guys are on equal footing. You're just bringing different elements to this partnership. They're bringing the capital, you're bringing the opportunity, and you're marrying those two things together to actually get the return that both of you are looking for. But in terms of how to find them, I think it goes back to what I was saying earlier, right? It's, can you put yourself in the room with the people who have the resources that would match what it is that you're looking for? And to actually point, you know, you can't just go around saying, hey, my name's Tony, can give me $100,000, hey, my name's Henny, will you give me $100,000? But you want to go around and just have conversations with folks, understand what their actual goals are, understand what their actual limitations are, what are they trying to accomplish and maybe they don't have the time to do. And seeing if you guys can actually partner up to make it a win win for both of you. So you know all the things I mentioned before about going online, doing it in person, those same strategies apply here to actually find that private money lender. All right, so we've hit the creative side, but there's one financing plan that lots of rookies overlook and it's something that you probably have already and I think it might be the simplest way to get your first deal. So we'll cover that right after a quick word from today's show sponsors.
- [29:34]
C
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A
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C
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- [32:55]
B
Back with financing path number five, and this one is a home equity line of credit or just a home equity loan. We saw home values in the United States go up pretty dramatically post Covid. And for a lot of folks who bought either pre Covid or shortly thereafterwards, there's a good chance that you've seen your property values increase a ton. And obviously if you've been in your house even longer than that, you've probably got even more equity. And everyone has a slightly different risk profile, which is fine. But if you're okay with tapping into that equity to help you fund your first real estate deal. That could be one of the lowest hanging fruits for you to go after to actually get the funds you need to buy your first deal. So a home equity line of credit is simply taking the equity you have inside of your home as collateral for a. Think of it as like a, like a large credit card. But you know, sometimes it's tens of thousands or multiple six figures that you can then use to go out and spend in whatever way you choose. Okay, so as an example, let's say that I have a hundred thousand dollars in equity. A bank will give me 80% of that equity. So I can get $80,000 in a line of credit from my local credit union. And I can then take that $80,000 and use that towards the purchase of my real estate deal. Okay, I could use it just as a down payment, you know, then you have to make sure you're factoring those payments back in to pay that down. But I think the way that we've seen folks use it more often is in some sort of short term basis. So you could use that $80,000. If you're flipping homes and you're using that, you know, as your kind of down payment or your portion of a hard money loan. So you've got your home equity line of credit, pairing that with your hard money loan, and now you've got essentially no cash out of pocket to go out there and take down your first flip. Six to 12 months later, you sell the flip, get the money back, pay down your loan, pay down your line of credit, and now you're ready to go do it all over again. Right? So that's the benefit of the home equity line of credit is that you're only spending what you've actually used so you can try the balance up. Go, execute, get a big chunk of cash, pay it back down, build it up, execute, get cash, pay it back down. So it truly works like a credit card, but with a, you know, much more spending power.
- [35:21]
A
So my first partner, for the first deal we used capital he had. For the second deal, he got a HELOC on his property. So he actually had a private money lender that lent to him for when he purchased his house. And there was never actually a mortgage filed on the property, it was just they had a signed contract and he paid his monthly payments and that was that. But to, to the bank, it looked like he owned his house free and clear. So he actually lucked out because it was super easy for him to get a home equity loan. And then for a third house he got a line of credit on the property too. So it looked like he had all of this equity and I think he ended up like you know, tapping into only X amount of it. So like even if his mortgage would have shown up when they run his credit or whatever like that loan, it still would have been like enough equity to, to you know, meet all of the requirements or whatever. But he, so we used the home equity loans. With the home equity loan it was the X amount of money and he had monthly payments. Then he took the HELOC and the heloc, he didn't pay that off right away. And after a period of time, I can't remember how much it was but I think after like 12 months of, of just paying the interest on it, they actually converted it into a 15 year note. So then he lost access to the HELOC as a HELOC and it actually he just had to start making the monthly payments to make principal and interest payments which he did know this was an option going into getting this type of heloc. So something to look into when you're getting you know, these lines of credits. Like, like they're not forever like think, you know, really understand how long are they open for, how long can you draw money for? Are there any implications where if you're not paying down any principal it converts to a longer term loan. So those are some of the things to, to look at when you're getting these loans. The one thing I really like about a line of credit is usually the bank will cover the appraisal. They you'll have very, very low closing costs to going into, to getting this financing. But Tony, I'm also very much team short term. We've had guests on, I've talked to other investors that have used it as down payments. I would only do this if you know that you will have the capital to throw at this to pay it off in a short period of time. So I've known some investors to actually take their cash flow from their other properties and just throw it all at this line of credit till it's it's paid off then once it's paid off. So they're not like actually drawing cash flow to live off of, they're just using that to reinvest. But instead of waiting to save up all that cash flow, they're buying ahead of time using the line of credit and then just paying off the line of credit then doing that again. I usually only primarily use my line of credits to purchase or. And, and then I'm going to refinance or sell the property, whatever, or for rehab. And I'm using the funds for the rehab, and then I'm going and refinancing and paying off my private money lender or whoever. And paying off my line of credit that I used for the rehab, too.
- [38:47]
B
Yeah, I think that is the way that at least would allow me to sleep better at night. You know, especially if we're talking about equity in my primary home. You know, I want to make sure that I'm hedging my bets a little bit to, to make sure I'm not putting my. My primary home at risk. But it is an option, and we've met lots and lots of investors who've done exactly that. So, guys, those are the. Those are the five financing paths that we think you should at least be considering. And the last thing that we want to hit is just how do you choose the right path for yourself? First, I think it depends on your personal situation. You know, it's the. These paths are options. We're not saying that any of them are ones that you. That you have to follow, but just take stock of where you're currently at and what resource you currently have available and what strategy you want to follow. Like, if you don't want a house hack, then obviously using an FHA loan isn't going to make sense. You know, if you hate the idea of cold calling sellers or trying to negotiate with sellers and maybe don't go after seller financing. So just think about which one lends itself best to who you are, what you're good at, and the resources you currently have. There is no right or wrong answer. And the reason we gave you multiple paths is because all of these can work, right? So just pick one, try it out, and see if that's the secret to help when you get that first deal.
- [40:07]
A
Thank you guys so much for joining us today. I'm Ashley, he's Tony, and we'll see you guys on the next episode of Real Estate Rookie.