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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.
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