In this blog I'm going to explain to you about the Property Investor Catch-22 and how to get out of it. This is often a deep subconscious level that most people don't even realise they're in, but I see this happen all the time. So I want to share it with you today to make sure you don't have this problem. This episode is actually part one of a two-part series, in which I'm going to explain how you can use other people's money and creative finance to fund all of your property deals.
So here's the problem faced by many investors, the Catch-22. If you're investing in property the traditional way, whereby you put in a deposit, usually 25% or 30%, at some point, everybody runs out of their own money, and so they stop investing. However, I believe there's actually plenty of money available if you know how to find great deals.
For many people, that little voice in the back of their head will kick in and start to say, "But I don't know anyone with money." Or, "Why would anyone lend money to me?". The idea of using other people's money is not so much about knowing who is going to lend money to you, but really the mindset and belief that it is possible to buy property using none of your own money.
As I've already said, if you find great deals, there are ways of funding them using other people's money. In fact, there are five principle methods of using other people's money, but I'll explain more about that later.
A mistake I see many investors make is they hear about no money down investing and they think they can get something for nothing. Often because they're looking for the get rich quick scheme, they're not prepared to put in time and effort to learn how to do this properly. In life, you don't usually get something for nothing. So please don't expect that. The reality is that if you're not putting money into the deal, then you need to put something else in instead. That might be your specialist property knowledge. It might be your creativity, your time and energy. The important point is you're bringing some value to the table instead of money. Someone else will take care of that for you.
The Importance of Finding Great Property Deals
With this in mind, one of the most important skills you need to develop and learn is how to find great property deals in your area. But here's the Catch-22, if you don't have the money to do the deals, most investors won't take the necessary action. They won’t go out and actually find the great deals in the first place. They're worried that if they do find a great deal, they won't be able to move forward with it because they know they don't have any money. Not wanting to let down the agent or seller is the Catch-22.
So how do you break out of this? You might think, "I don't know if I'm in this or not." But if you're not finding as many deals as you would like, if you're not taking as much action as you'd like, it might be because you're in this Catch-22.
There are two elements here. You do need to know how to find great deals, but before this, you need to build your personal belief. You need to believe it’s possible to do deals using very little or none of your own money.
I’ve mentioned thinking bigger than you're currently thinking in past blogs. Most people limit themselves to the resources they have, and if you're trying to find the deals that everyone else is trying to find, there's lots of competition. If you think about bigger deals, because you're not worried about how you're going to fund them, you believe the money is out there. There's less competition to do bigger deals. This means you can make more money and you can afford to pay someone else.
I want to be really, really clear here. When I talk about a great deal, I mean one that's got enough profit in it, so actually you can afford to pay a good return to whoever does finance a deal for you, and there's still enough profit to make it worth your while.
“You need to believe it’s possible to do deals using very little or none of your own money.”
Different Ways of Funding Deals Using Other People’s Money
There are many different ways of funding deals using other people's money, but they boil down to five principal methods. Which are, number one, Joint Venture with a Cash Investor. This is typically where you find a great deal and someone else puts all of the money in, and you share the profit and you share the risk.
Now that's great, a good way to start off. However, it's quite expensive because you're giving away half the profit. So the second method is better, which is where you do a Private Loan with someone. You find the deal, someone lends you all the money, and they don't get a share of profit. They don't get a share of cash flow and equity. Instead, you give them a fixed return on their money and you keep the majority of the profit.
Number three is a Purchase Lease Option, a great strategy of acquiring and controlling a property without getting a mortgage or putting a big deposit in.
Number four is a Joint Venture with the Owner. So let's say someone's got a property and it has potential for development and they don't know how to do it. They don't have the money to do it or the time or energy. Well, they can put the property in, you can bring the money in, and you fund the deal using none of your own money.
Finally, number five is Vendor Finance, where actually the seller helps provide the funding for you to do the deal.
Basics That You Need to Know About These Investing Methods
First of all, if the deal is good enough, there will be at least one of these principles that you can use to acquire this property using none of your own money. Let me say that again. If it's a good enough deal, you will be able to use one of these five methods.
It’s important to note though, not every principle will work all of the time. This is a huge mistake I see people making. They might learn about something like Purchase Lease Options, and then they try and make every single deal into a PLO. Tools like Purchase Lease Options only work in certain circumstances. So you need to use the correct tool at the right time to make Creative Finance work.
Whenever you approach a property deal, try to have a really open mind and be careful not to make assumptions about what the seller wants or what you want to do with this deal. Instead, we need to ask them lots of great questions. We need to listen very carefully to what they say, and then we work out the best solution given their circumstance and requirements to come up with a win-win for everybody.
You need to understand each of these five tools, how and when to use them so that you have a full investor toolkit. You can use the right tool at the right time to get the best results for everyone. Remember, it's always about the win-win.
The other thing you really need to get into your head is that using creative finance principles, you are helping other people, not just yourself. I really need you to understand this because this will make all the difference. You are helping the seller get rid of their property. You are, of course, benefiting yourself because you're acquiring a property, which is going to give you cash flow now and long-term equity growth using none of your own money. But more importantly, you are helping whoever puts the money into the deal to make money for themselves. This needs to be a shift in your mindset.
I highly recommend that you start thinking about how you can make money for other people in property, not just yourself. You see, if you're making money for other people, they will want to work with you. So from this day forward, whenever you approach people about getting involved in financing your property deals, it's not about you asking them to help you, but instead you offering them the opportunity to make money. It's a slight change in perspective, but it will make all the difference and it will transform your investing.
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