Finance Your Real Estate Investment Properties
BATTLECALL GUEST EXPERT: Peter Dobler, Dobler
Properties
Unlike traditional residential real estate mortgages, real estate investment
financing is way more creative and offers more options than you think. The
golden rule in real estate investment is OPM (Other People's Money).
I have enough money; shouldn't I buy my real estate investment for cash? No,
I absolutely advice against investing large sums of cash into a single real
estate investment. There are two reasons why not. First, you give away most of
your profits by not leveraging your real estate investment. Second, it is far
too risky to put every egg into one basket.
Let me explain the leverage issue for a moment. I will give you an example of
a $100,000 investment property that typically increases its value (appreciates)
by 7% average a year. Maybe more, maybe less depending where you live. Paying
all cash for this property will yield in a 7% appreciation profit plus the net
profit from renting the place. Now you're looking at roughly 15% of returns.
If you're conservative with your investments you might be satisfied with this
kind of a return. These days you might get equal or better returns with other
conservative investments minus the hassle of being a landlord. But you don't
mind being a landlord, because you understand and utilize the leveraging method
with financing your real estate investment.
With the example above you will make roughly $15,000 a year in profits from
your investment. Now let's take a closer look at what leveraging can do for you.
Today a typical real estate investor can get financing as high as 95% - 97% of
the purchase price. Occasionally 100% financing is available as well. But this
would be totally unfair in this example to compare this with all cash
purchasing.
15% return sounds like a lot, but wait till you see this. Let's assume that
the rental income will cover all your expenses including the mortgage payments.
Taking the same example from before your net return would be the 7% appreciation
profits of your property. This would translate into a $7,000 a year profit. With
a 95% financing in place you would get $7,000 return on $5,000 (your 5% down
payment) invested. This is a whopping 140% return on investment.
With the same $100,000 you can go out there and get 20 investment properties,
finance 95% of it and make an amazing $140,000 profit a year. This beats the
projected $15,000 profits with an all cash transaction any day.
Of course you will have a lot of trouble to get financing for 20 properties
in a single year. Typically 5-6 new rental property mortgages are the maximum
lenders will allow these days. This is the signal to get creative with your
financing structures.
In this case sellers financing would be your key to achieve your goal of
maximum leverage of your investment dollars. Despite the message from all these
late night infomercials, seller financing is harder to get than they want you to
make believe it is.
It all depends on the seller's ability to offer seller financing and the
seller's motivation. Only about 1 out of 20 properties for sale are able to get
seller financing. That means that there's no mortgage balance on the property.
From this narrow selection the seller must be motivated to sell under these
conditions. This could be tax reasons, time constraints, personal reasons and
many more.
As you can see this translates into a lot of work to achieve your goals. But
let me tell you one thing. This separates the tire kicker real estate investors
from the real go-getters. Wouldn't you agree that a little bit of hard work and
determination is well worth it to build a real estate empire?
I think it is well worth the trouble and hard work. At the end of the day you
keep building your real estate investment portfolio and sooner than later you
will be able to cash in.
Got an opinion? We want to hear from you. Post your thoughts or comments here in our Mortgage Warrior Forum. Come join the conversation and say hello...onward mortgage warrior!
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