I always get a lot of questions about how to handle the money so I’d like to go over a few of the basics.
Touching the Money
Sometimes when people hear the kind of interest I pay they will get so excited about loaning me money that they want to hand me a big check right on the spot. This is not the way to handle the situation. I want them to send the check to my attorney for the closing on a specific property.
I know that some of you are so eager to launch this new phase of growing your business that you really want to take that first check but don’t do it.
Here is why. You have promised the lender that the money is secured by real estate. So you don’t want to touch unsecured money. The money must be secured by real estate or in the eyes of the SEC you have committed FRAUD.
This is the procedure: have a meeting of the minds, and then they send the check to the closing agent for closing. Nice, neat paper trail and well-informed lenders.
Here is a common scenario: You will have two lenders who each have a small amount to loan. With the combined amount, you have enough for a particular property. Question: Can you just put the money together and have them share the first mortgage? No. You cannot co-mingle funds.
Now my procedure is to give a lender a first mortgage on a property. If I need additional funds, I can give another lender a second mortgage after explaining to them that the first mortgage holds a stronger position.
BUT… if you do some paperwork with the state and set up an entity. Then you can pool money…
When do the payments start and end
This is a little tricky for some real estate investors to understand. The best way to structure this is to start paying interest from the day of closing. Their money is loaned so they should be earning interest. My job is to make repairs and get the place lease optioned so it is producing income to cover the interest payments I need to make to the lender. I get this done as quickly as possible.
I continue paying interest to the lender as long as their money is on the property. When the property sells, They get a check at closing for their principle and interest.
I ask them if they want to loan their money on another property. Nearly all will say yes and then, their interest payments start again at the next closing (to buy) table.
So they earn interest while the money is loaned – from purchase to sale.
Now if I have some ones money less than 90 days, say on a house I wholesale, I do pay a minimum of 90-days interest on all loans. I just want to be fair.
The lesson here is avoiding the temptation to grab those checks and cash them. Run a professional operation and have your business rules in place and follow them.
You’ll be much happier in the long run.
Alan Cowgill is a speaker, author, and real estate entrepreneur. Alan has bought or sold over 200 investment properties. Alan Cowgill is a regular guest speaker at CT REIA. Go here for the current list of upcoming real estate investing seminars in Connecticut.