Funding Your Real Estate Investment with Equity Partners
Another money source for real estate investment is equity partners, or otherwise referred to as EP’s. This source is one that can be a goldmine for investors of all shapes and sizes, and is a hybrid that allows you to combine the other money sources to get deals funded. Who are these EP’s? They are the same people as mentioned before in the private funds/lending section. They are a catalyst to get funding for deals by leveraging their good credit and income.
The potential EP will have the credit scores and income you need to secure financing, but not the money in some cases, so by definition he cannot be your private lender. EP’s are financing the deal you present, and longer-term financing, through money source number one, which is another distinction between this source and the private lending source, which is usually just short-term financing.
This source is actually my favorite because the more EP’s you have, the larger you can grow your real estate empire without having to ask others for money. An EP is defined as a partner to a real estate team who lends his/her income and good credit to help finance the real estate deal, and becomes a partner on that deal with the investor, in this case you, to secure financing terms.
EP’s are a good way to start your business if you have some credit or money challenges. This source also allows for growth when you have reached your current financing limit according to regular financial institutions, because remember, even if you are going to finance your own deals and you look perfect on paper you cannot escape the financing limit of 10 financed homes, according to Fannie Mae and Freddie Mac. Most EP’s execute an operating agreement for the specific address and legal description of the property spelling out all of the details and get moving on the next piece of real estate.
There are three main determining factors:
- The first is making sure you’re after repair value (or ARV) for the property has at least 30% equity. This 30% equity is based upon the ARV of the property (I.E. The value of the property once the work on the house has been completed). As long as you have a property that has 30% or more in the finished product then you can get 100% financing through private funds and hard money lenders.
- The second factor is making sure your EP has the right credit score, a 700 score for less than four homes financed and a 720 score for financed home number five and up in order to qualify for funding.
- The third factor is that the EP has to have enough income to qualify for debt ratio funding. Debt ratios are calculated by taking the payments on your credit report, plus the new house payment you are applying for and dividing it by your monthly gross income. Your equity partner for investment financing approvals should be around 45% or lower to make sure that you can get the approval.
- An example would be: You have $200 in credit card payments, a car payment of $400 and a current house payment of $900. These total payments equal $1,500 per month. Your income is $5,000 per month. Take 45% of your monthly income of $5,000 which equals $2,250. So, to see how much you qualify for you take $2,250 and subtract your current payments of $1,500, and you have $750 left for an investment property house payment to qualify. Don’t forget that if you have a rent or lease payment that is added that you can offset almost any payment, because the new payment is virtually neutralized by adding more income. The rule of thumb is you can count 75% of the rent or lease payment. Your EP should always qualify even if they have only one dollar left for a house payment as long as 75% of the rent/lease payment equals the house payment on the new loan.
Here’s why we call it financing with leverage…This EP money source creates more funding for your real estate business by using equity in properties you bring to the table, while leveraging other people’s money in the form of private funds and hard money lenders, which is our final money source. You then turn the deal into old-fashioned bank financing with equity which leads to just paying off the private funds or hard money lender with no money out of pocket.
Let’s discuss the main reasons why you want to make money source number three one of your best sources for real estate success:
- Your current credit score is not where it needs to be.
- Your real estate plan exceeds the limit of financed houses placed on investors by banks.
- Your income is not currently where it needs to be and you have followed the rule so perfectly that banks will not lend to you anymore. It does not matter if you have an 800 credit score or a 400 credit score. It does not matter if you have $250,000 to invest or $50 to invest.
No matter what your situation is, you will be able to play with other real estate professionals. This is why money source number three, equity partners, is the most powerful weapon of all. If you are bringing an equity partner to the table, the real estate gods don’t care if you have a 400 score, you have money. This money source uses other’s credit and income, so yours is now irrelevant.