Good Financing Is Your Key to Creating Wealth

Many years ago one of my mentors told me that you can have a perfect property, (if there is such a thing), and turn it into the most horrible property with bad financing. Getting good financing is the secret to creating wealth from real estate. Let me give you an example.

Today I am seeing all too many inexperienced investors talk about using OPM, (other people’s money). Using other people’s money can be a good strategy in certain circumstances, but not in every situation you find. For instance, using hard money loans will only work on short turn around properties, or fix and sell retail properties that can be sold in a short period of time. Over the years I’ve seen all too many inexperienced investors who bought houses in lower socio-economic areas or areas where people who can’t qualify for a loan are forced to live. These investors borrow hard money at 12% to 15% with interest only payments at 50% to 65% loan to value (50% to 65% of the after repaired value of the property) that have short payback periods from 6 months to one year. The investors fix these houses then try to rent or sell them. 

The problem comes when it’s time to refinance the property and pay off the hard money loan  on the property the investor wants to keep long term. At that time the investor is going to find it nearly impossible to find a lender who will refinance a property in those areas. Because of their inability to refinance their properties and the hard money lender is demanding to be paid off puts the inexperienced investor in a very bad position. If the investor isn’t unable to do some type of refinance they face one of two things happening, either face a foreclosure on their record or they will be forced to deed the property they worked so hard to repair back to the hard money lender to avoid being foreclosed out of the property. The hard money lender then has to spend more money in most cases to sell the property to get their money back. This can ruin the investor’s reputation with other lenders in the future. When this happens there is no winner, both parties lose. This is definitely not a formula to build wealth for the investor.

As I’ve said a million times, it is better if you can pay the seller every month instead of getting a loan from a bank or lending institution that usually has a higher interest rate and a higher monthly payment which prevents the investor from making even a meager monthly cash flow. Remember, each rental property is a stand-alone business that must pay for itself from the rent it brings in each month or the investor must reconsider why they would buy that property.

Borrowing money from an institutional lender is a difficult problem for most investors. Almost all lenders are reluctant to lend money to investors. If they do lend to an investor they usually charge the investor a higher interest rate which makes their monthly payment higher and may prevent the investor from having a positive cash flow every month. If you can get any seller to allow you to pay them every month for 20 or 30 years it will always be much better simply because there will be no excessive loan application fees and higher interest rates in most cases, and I’ve never met a seller who is a member of a credit bureau who can report late payments. If the seller will allow you to pay them every month, the payment amount and the term of the payback, either with interest or not is negotiable and the terms you make with the sellers are not written in stone. This is provided that you do like I do and only focus on looking for FREE and CLEAR properties to buy where the seller can actually make a satisfactory deal for both parties and allow you to pay them for many years instead of you having to pay a Bank. My question is, why would you deal with a Bank when you don’t need to? Getting good and affordable financing on long term keeper properties truly is your key to building wealth.

Until Next Month

Happy Investing and Good Luck

Larry