“I hate banks. They do nothing positive for anybody except take care of themselves. They’re first in with their fees and first out when there’s trouble.” – Earl Warren

There are two difficult aspects of real estate investing. The first is finding the right property to invest in. The second is determining the optimal source of financing to buy it.

Today, I’d like to discuss the financing with you. I have found that most real estate investors (particularly new investors) find this to be the more intimidating, unpleasant, or confusing part. Especially if they have recently changed jobs, have poor credit, or have other “issues” that traditional lenders frown upon.

And the truth of the matter is, even if you have perfect credit and a long history with a high-paying job … there are financing obstacles that can block your ability to be profitable – especially as you become more aggressive with your real estate investing. The Pitfalls of Your Typical Financing Options

There are six avenues most real estate investors pursue. (Note that I say “most” investors. Personally, though I have used most of these sources in the past, I rarely do today.) And all six have disadvantages.

1. BANKS

Loans can be difficult to get if you’ve recently quit your job (or sometimes even if you’ve changed jobs).

You need a down payment.

You need decent credit.

You can lose time trying to close the deal – which translates into lost deals and lost profits. You often have no relationship with the bank. You’re just a series of numbers.

Banks can change their rules instantly.

You have to deal with mountains of paperwork.

The loan goes on your credit report.

You must provide stacks of documents.

You’re bound by the bank’s rules, so you have to jump through their hoops.

You’re not in control.

Some banks require monthly payments that cut into your cash flow.

Often, banks require you to pre-qualify the property, making it difficult to purchase fixer-uppers

Let’s face it, investment properties can be some really nasty stuff. I work mainly as a rehabber – and beyond the trash and that horrible smell, some of the houses I buy don’t have roofs, or windows, or furnaces, or plumbing. Fixer-upper investors buy trash and turn it into cash. Banks don’t seem to understand that. A bank actually refused to loan me money on a house for four and a half months, because it didn’t have a furnace. (Gee, I thought the idea of being a rehabber was to buy an ugly stinky house and fix it!)

2. HARD-MONEY LENDERS

They are very expensive.

Your credit score may still factor into whether they’ll loan you the money.

You need a down payment with some of these lenders.

You only have one exit strategy: Sell for cash.

You don’t have any control.

You won’t have any up-front fix-up money.

3. LINES OF CREDIT

You’re required to make monthly payments, which cuts into your cash flow.

You have a limited amount of available money.

Your loans can be called back … and you’re cut off.

You don’t have any control.

4. YOUR OWN MONEY & CREDIT CARDS

You have a limited amount of available money.

You could make more by loaning your money out.

5. CREATIVE TECHNIQUES WITH THE SELLER

These opportunities can be difficult and time-consuming to locate.

You don’t generally find the cash needed to rehab.

6. PARTNER(S)

You must share/lose a large portion of the profits.

You may have to share decision-making power. A Financing Alternative

I started my real estate business by using banks, savings, credit cards, lines of credit, creative techniques with sellers (like land contracts and lease options), and partners. But, once I was self-employed, it was harder to get loans to purchase properties.

That’s when I started pursuing private money lenders. These are individuals, with cash available to invest, who choose to loan me the money for my real estate projects, rather than investing in a low-yielding CD or other vehicle.

Private money lenders can be personal friends or colleagues, but they certainly don’t need to be. My first private lender was my mother (back in 1989) – but since then, I’ve found an entire network of investors through some simple marketing techniques.

Two of the best reasons to work with private money lenders are: 1. Speedy and constant access to funds

With private lenders, my funds are available all the time. When a good deal comes my way, I can grab it, because I know the money is waiting for me. While my competitors are scrambling around applying at the bank, I’ve made an offer and closed the deal. My rehab crew is all over the property like ants before the competition knows what happened. I love having private lenders for my business. 2. No monthly payments required

As my use of private lenders increased, I learned that some of them didn’t require monthly payments. That’s when I started to structure my loans so I don’t need to make a single payment until I sell the property.

This is a huge benefit. Imagine what it has done to improve my monthly cash flow. Of course, my mom will always get monthly payments from me, because she is retired and depends on that income. BUT when I’m dealing with anyone who can wait for their money, I let it accrue.

Today’s Action Plan: In my next article for ETR, I’ll go into more detail about private money lending, and how you can use it to propel your investments. Meanwhile, you now have two reasons to consider working with a private money lender – the SPEED it gives you to purchase a property, and the improved CASH FLOW (because you don’t have to make monthly mortgage payments while you let your interest accrue.)

[Ed. Note: Alan Cowgill is a speaker, author, and real estate entrepreneur who has bought or sold over 200 investment properties. He will be speaking to a select group of Early to Rise readers about private money lending later this month. Learn how you can become a part of this discussion.

E. Alan Cowgill is the owner of Colby Properties, LLC. and President of Integrity Home Buyers, Inc. Alan is a full-time Real Estate Investor, investing in single family and small multi-family properties in Springfield, Ohio. Since 1995, Alan has bought and sold over 200 investment properties. Alan uses Private Lenders, not banks; to fund his real estate purchases. By doing this, he has created his own private bank of $2,000,000 in funds. Alan looks for "Win - Win" situations, where the seller, the lender, and the eventual homeowner can all "Win". He is not a Realtor, but a Private Investor. Alan has served as an elected official to the Board of Directors for the Clark County Property Management Association. He is an author, consultant and national speaker. He has been asked to speak on the topics of "Investing for the Beginning Investor." and "Finding Private Lenders." His home study system, "Private Lending Made Easy", shows new and seasoned real estate investors how to find private lenders for their own real estate business. Alan is married and the father of (3) children.