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.
Sincerely,
Peter Dobler
(c) 2005
Peter Dobler is a 20+ year
veteran in the IT business. He is an active Real Estate
Investor and a successful Internet business owner. Learn
more about real estate investments at
http://www.suncoastrenttoown.com
or send a blank email to
mailto:suncoastrenttoown@getresponse.com
