Another lending term I hear all the time is GAP lending. Eric, tell me about the gap. What's gap lending?
I'm going to tell you about GAP, but I'm going to tell you a story first. Use your imagination and go with me on this story. Just humor me for a second. So let's imagine all of us, we became general contractors. So we went out, we got our education, our license. We went out, bought our big truck, and a big trailer. And we got our first contract. And this contract is on a high-end house, at the end of the day, our fee will be a couple hundred thousand dollars. We are so excited about this. And then we walk back over to our trailer; we open up the door, get our toolbelt on, and guess what we only have one tool in our tool belt. Which is a Phillips screwdriver. And the expectation is for us to do this entire gut and remodel job with one tool.
Now I can imagine many of you are like: are you serious, Eric? Are you actually bringing this forward to draw this point? Yeah, I am! Because far too many real estate investors think if they have one lending option available to them, that's all they need. And that's incredibly not smart.
In that case, what would make a successful contractor?
Think about a successful contractor; what do they have? It's like saws, right, hammers, nail guns, mallets, how many drills. Go through all the things that a successful contractor needs. And to be a successful real estate investor, you need as many different lending options. And that's where gap lending comes into place. Because you may need a certain amount of funds not only to close a deal, but you might need the interim funds. Maybe you need a hard money loan here, and maybe you need to get a gap loan over here. To be able to put permanent financing that you're going to keep as a rental. And then so you need one resource to go to another one. You want to have as many tools available to you as possible.
And so a gap lender could simply be, maybe it's a private lender. And this is somebody you meet at a real estate investment club. Maybe this is Aunt June or Uncle Bobby.
The great thing about real estate is, I always thought I knew who had money. And I was wrong, OK. I would take it by outward appearances, but that's not reality. What you do is you be in that place to where you ask. Remember, you're adding more tools to your toolbelt when it comes to funding. And so ask the question: have you ever thought about being the bank in a real estate deal?
Tell us more about what it takes to become your own bank in a real estate deal.
Go get a commercial lender; go get a line of credit. Good heavens, you're setting up your entity or LLC, establish some corporate credit for your entity. Or go ahead and create lines of credit even in your personal name, on your property. Or other properties. You could even use one property for collateral on another property. It's like where is the gap in the deal. What is missing to be able to complete that deal? And be creative on how you solve it. At the beginning of this, I shared with you the first deal that I did. Where was the gap?
What happened was, I got a 60% loan from a bank, and there was a 40% gap. Where did I get the rest of the money? Well, I went to the seller. And I had the seller finance the other 40%. That was the gap that I needed to close the deal. Whenever you're looking for that creative, or to complete the deal, use your creativity, because it could be any one of those different funding strategies, that could be the gap that allows you to be successful with real estate.
So here's the thing, close the gap! Alright? Have fun with it.
Eric, everyone is worried about retirement, and so we have these IRA's out there. What's a self-directed IRA?
Oh, that's a good question! Now I like stories way too much. So I'm going to share with you an example first. I personally believe they are one of the best-kept secrets in funding your real estate or your tax lien strategies. So first off, for this story. I often will ask investors–to understand where they are. I will ask them about their cash situation, their financing situation, what tools they have available to them now. To see where they are so we can see the right days and get their toolbelt full of their funding, right?
And so often, investors will come back to me, and they'll say, hey Eric, I don't have any cash. I don't have any funding options, but I do have 600,000 in my IRA. And I'm like, huh, OK. So you look at that, that's a tool that can be leveraged, right? And I think most individuals think, if I've got 600,000 in an IRA, well, if I access that, what's going to happen.
What are the drawbacks of a self-directed IRA?
There's going to be penalties, taxes will be crazy, and all those other things. Now initially, you should have had the opportunity to be introduced to a self-directed IRA or what that looks like. If you haven't been, I will encourage you to look into it because it is super valuable. What it allows you to do is to be able to access your funds, and you actually take control over how those funds are used.
Now here's the thing I will give this disclaimer. Make sure you have your proper legal and tax advice on this. But I'm just sharing with you information on why so many individuals use the self-directed IRA. And so with that, what they'll do is they will take those monies and put them in a self-directed IRA, and all of a sudden, you're not in a place where you had to pay all those fees and taxes like you would be if you withdrew it. And so you can actually grow depending on if you have a traditional or a Roth IRA, and you'll want to talk through as you do while investigating how that applies to you. But what happens is you can use that money for investing. You could use that money to lend to other investors. You could actually be the lender to other investors.
Any other potential restrictions to know about?
Now there are some restrictions on that with family members and what you could actually have that be a part of your investing strategy. You could also use it for rental properties. There are many different forms that you could use your self-directed IRA for. And if you haven't looked into it, I would strongly urge you to check it out this week, self-directed IRA's. Check into it, add that to your toolbelt as an incredible tool when it comes to your funding options.