Welcome to part two of the Property Investor Catch 22, and how to get out of it, series. I'm going to cover in more detail, the five different principles of Creative Finance. Where you don't need to use any of your own money to invest. This is really important for you to understand, because at some point, everybody runs out of their own money, and usually, that means they stop investing. At that point, most people fall into this Catch 22, even if they are not aware of it. Now, personally, I believe that when you know how to find great property deals, then you don't need to use your own money. That's because there are ways of financing them with no money down, using one of these five creative principles. It's a Catch 22, because if you don't have the money to do the deal, what happens is most investors won't take the necessary action to go out and find great deals. They're worried that if they do actually find a great deal, they won't be able to move forward with it because they don't have the money to do the deal. Thus, the catch 22.
To make sure this is not a problem for you, and also to avoid this often unconscious catch 22, let me share with you some more details about the five principles of Creative Finance. I want you to remember, that if a deal is good enough, there'll always be at least one of these principles, which you can use to acquire property using none of your own money. However, remember not every principle works all of the time. They only work in certain circumstances. I want to share those circumstances with you in this blog. You need to use the correct tool at the right time to make Creative Finance work. This will make a lot more sense as we go through each of them. So let's look at these five principles in turn and give you a bit more detail about them.
Joint Venture With A Cash Investor
So first of all, and I think most investors are aware of this, which is number one, Joint Venture with a cash investor. So the way this works, you go and find a really good deal and you run out of your own money. You then think rather than not being able to do the deal, you would rather share 50% of the cashflow and 50% of the equity with someone else who provides all of their money. Very often people confuse this they think, "Well, if it's a Joint Venture, "I'll put in half the money, "the other person will put in half the money as well." That's not what you're talking about here, because at the end of the day, you found the great deal in the first place. If there was no deal, well, there'd be no deal. If there was no money, well, there'd be no deal as well. So really, the deal and the money have equal importance. You bring the deal and do the work, someone else puts the money in.
When you do a Joint Venture Agreement with someone you're effectively entering into a business relationship with them. It’s important you know this person really well, you’ve got to like them, trust them, and know that you can work through challenges as they arise. This will happen in property, there's always problems, you need to be able to work constructively with this person to be able to move forward.
Private Loans in Property
So Joint Ventures can be very, very powerful. However, you are obviously giving away 50% of the profit in the deal. Therefore rather than a Joint Venture, if you can use the next method of Creative Finance, it's probably much better, which is a Private Loan. Often people get Joint Ventures and Private Loans confused, and let's just clarify the two. So a Joint Venture is where someone else puts the money in, you do all the work and there's a split of profits, equity and cash flow, and there's a share of risk and a share of the reward. Whereas a Private Loan is a little less risky. Now there's always risk for the lender, but there's less risk for them because they put the money in, they get a fixed return on their money and they get their money back plus interest, before you make a single penny of profits.
There is less risk for people when they're doing Private Loan. As long as you know what you're doing with their money, a private loan can be much better for you because instead of giving away 50% of the cashflow and 50% of the equity growth, instead, you're giving away fixed interest rates. Even if that's a high interest rate, once they get their money back, they stop earning any money. Whereas with a Joint Venture, they're a partner with you until you sell the property. So, although Private Loans might seem a little bit hard to get, it's worth putting in the time and effort to find people who will lend money to you. Who's going to lend you money? This is what people often worry about. Well, there are lots of people who've got money in the bank doing absolutely nothing for them.
If you remember from part one of the Catch 22 Series, I shared with you that we want to look at this as an opportunity we're giving to other people. We're helping them to make money, rather than you feeling you're asking for money from them. This is related to mindset and mindset is very important when it comes to Creative Finance. I see a lot of people who might find a great property deal and they decide to do a Joint Venture, and use momentum investing, where you're buying at a discount, you're adding value through refurbishments and thus taking all of the money out. They do it as a Joint Venture. To me, that seems crazy. Why on earth would you give someone 50% of the profit, even once you've given them all their money back.
The problem is, when many people start investing, they think they have to give a lot away. They become involved with Joint Ventures, they find that lots of people are really happy to put money in and get half the profits for none of the work, and they just stay doing it. So if you're in a Joint Venture partnership right now, nothing wrong with that, but it's probably costing you a lot of money. A more advanced strategy would be to move to Private Loans.
Very often when you speak to someone and you explain you're investing in property, rather than just getting a fixed return from a Private Loan, they often want to get a share of the equity. They want to get a piece of the cake. Well, that's fine, but you need to explain to them, they're also getting a share of the risk. If things go wrong, they're sharing the risk, whilst with the private loan, they get their money back before you get money. That's a really important distinction you need to make.
“The whole point about these creative solutions is really understanding what’s important to the owner? What do they want to achieve? Which of these strategies might be appropriate to use? “
Purchase Lease Options
The third creative strategy where you use a very little of your own money is a Purchase Lease Option. I call it a strategy but it's actually a tool, a tool that can be used in conjunction with every other strategy. If I had to start investing again from the beginning, I would work with Purchase Lease Options, knowing what I know now. I think every investor should be able to have them as part of their property investing toolkit. I meet a lot of people who think they know about Purchase Lease Options, because maybe they've watched some videos or listened to some podcasts or maybe even done some training, but they've not actually been able to acquire any property as an Option. My suggestion would be, that if that's the case, they don't actually know enough about Options. If you did know Options properly, you would definitely have one by now.
Options work best when you find a seller who doesn't want their property, and don't really need the money now. Most people selling a property need the cash right now, but there's a whole lot of people who are selling because they just don't want the property. They don't want the hassle, they don't want a liability, and if you can step in and take away that hassle and liability from them, you enter an Option Agreement. Whereby you rent the property from them now, and you've got the right to buy the property in the future. You don't have to buy, it's the right to buy,it's a great position to be in. It particularly works well, when someone just wants to get rid of the property, but they really don't need the money. It could be a deceased estate, it could be a landlord who started to sell up some of their properties, they don't need the cash, they just don't want the hassle. Very powerful, but can only in certain circumstances.
One of the challenges with an Option is when people say, "Well, what if you don't actually buy?" Because remember you are not obligated to do that. So Vendor Finance, which we'll come to in a moment is another strategy you can use. That also works when the seller doesn't want the money now, but they don't want to do an option because they want the certainty. We'll come to that in a moment. Before I do, I want to talk about the fourth method of you using Creative Finance. This is where you do a Joint Venture, but a Joint Venture with the owner of the property.
Joint Venture With the Owner of a Property
Just think about that for a minute. Someone's got a property they don't want, they want to get rid of it, but actually there's potential to add value to that property. That's why you're interested in it in the first place, because maybe it can be converted into a different type of property, Normally, most investors would think, "Well, I've got to buy that or I've got to put in a deposit, "I've got to pay my stamp duty, my legals, "I've got to get a mortgage, "and then I've got to find the money to do the work." However, you can say to that owner "If you're prepared to wait a little bit of time for the money, I can actually give you more money." There's a way of paying more money for that property, without costing you a single extra penny out of your pocket. So how can you do that? If you are going to buy this property, you would have to pay Stamp Duty. Whereas if you Joint Venture with the owner, you don't actually buy it. You enter into an agreement, they effectively put the property in, you get the work done. I'll tell you how you can fund that in a moment using none of your own money, but you work together to improve the value of the property, then the property is sold. So because you've never bought it, you're not paying Stamp Duty, the end buyer will pay it instead.
You're avoiding the step of buying it. You're controlling it instead, you're doing a Joint venture with the Owner. What you would have paid in Stamp Futy to the government, to the tax man, you can pay that as extra money to the seller and it's not costing you any extra money at all. The benefit is, you're not having to find a big 25% deposit to put in, you're not having to get a mortgage, and you're not having to pay a monthly mortgage fee or pay bridging fees because the owner owns the property.
You can go to an organisation like CrowdProperty, which is another one of my businesses, and they are very happy to fund development projects where they can put in all of the money, if there's enough security in the property. Obviously this would be in agreement with the property owner. You can then use your expertise or bring in a team of people to develop that property, it's then sold, and the owner gets their money, Crowd have paid back their money, and then you split the profit with the owner. So, this is a way of doing a development project, using very little of your own money.
It's just about thinking creatively. The whole point about these creative solutions is really understanding what's important to the owner? What do they want to achieve? Which of these strategies might be appropriate to use?
The final method, which I've just mentioned earlier, is Vendor Finance. This is another misunderstood topic. Most people think you can't actually do it because they're not thinking in the correct way. There are four different ways of doing Vendor Finance, but let me give you the basic principles. So this works very well when a seller has got a property that they don't really want in their name anymore. Maybe it's got some equity in it, but they're not prepared to sell at a discount. They want to get rid of it, but they want to get the full value for it. However, they don't need all of the money. It's similar to an Option, they don't need the money now, they're probably just going to stick it in the bank.
Here's what you do. You speak to the owner about potentially buying it at the full price that they want. Yet you need to make it clear that in order to do this, they need to help you buy. They actually help you fund the deposit. You can’t do this with lenders because they would want to see you put a deposit in. Instead, you’d probably do this with Bridging Finance.
If there's a mortgage on the property that needs covering, you'd get a Bridging Loan to cover that. The rest of the deposit is put in by the owner. They don't physically put the money in, they just issue a loan note to you, so it means at the time of completion, the property is put into your name on land registry at the full price, but you haven't had to transfer any money over. Instead, there's a loan note, so a debt that you still owe to the owner of the property and you pay that through cash flow from the property. So here's the great thing. You can actually use cash flow generated from the property to cover the interest that you need to pay to the owner.
At some point, they're going to want their capital back, that might be after you've added value, or if they're happy with the return they are getting, they might be happy to leave the money there for three or five years after which you can probably refinance. Take the money out and pay them their cash.
With all of these five strategies, we're using different circumstances, but if there's a good deal and there must be enough profit in the deal to be able to pay someone else. Whether it's a Private Lender or a Joint Venture Partner or the owner, who's doing Vendor Finance. It's got to be a really good deal, but if it's a great deal, then you will be able to use Creative Finance.
I highly recommend you start thinking about how you can help make money for other people from property, not just yourself. You will be helping other people and that's why people are happy to do this. If you make money for other people, they will want to work with you. 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 to help them make money.
In summary, the five principles are, Joint Venture with a Cash Investor, Private Loans, Purchase Lease Option, Joint Venture with the owner and number five Vendor Finance. I do hope this has been useful and helped open your eyes to the world of creative finance. If this has done that for you, then I've got some further online training for you completely free of charge, which I highly recommend you watch. It will help you understand how you can use Creative Finance and do more property deals using none of your own money.
Remember to always invest with knowledge, invest with skill.
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