Starting out with Real Estate Invesment
Check out this complete introduction to fix and flip funding, buy and hold funding and starting out as a Real Estate Investor:
Real estate investing can be a very expensive habit. You will need money to finance the purchase, rehab your fixer-upper, and or cover the holding costs while you prepare to flip or rent the property. The flip side to this is, the less of your money you can use and the more you can borrow, the bigger the ROI (Return on Investment). Lining up financial resources (like our Line of Credit), well in advance of searching the neighborhood for investment property opportunities enables you to snag a deal and gives you the leverage in negotiation the price you will ultimately pay for a property!
As you may know, there can be a few offers on a property and the seller may take yours solely on the fact you have financing in place to close that deal quickly. If you’re thinking you can’t get your hands on enough cash to fund a property, we work with thousands of lenders nationwide who will work with 1st time investors.
While you become a real estate investor, you are essential building a business; this business should be built on a STRONG foundation. This foundation will need to be made up of a 3 key elements-
- A good RE broker / agent. You need to find a real estate agent who’s in the “know” about GREAT investment property deals (fix and flip or buy and hold).
- If you are a rehabber, you will need a decent rolodex of contractors. This is very important because fix and flipping is ALWAYS on a tight schedule of completion.
- If you don’t have a broker that’s on their feet 24/7 helping you get your loan or line of credit closed, you may miss out on tons of deals in the future. iFundRehabs.com has agents across the country willing to assist 24/7.
If you are eager to start out on the road to building wealth through real estate, it would be VERY beneficial to follow our blog. We will teach you things most mentors charge THOUSANDS of dollars on a recurring basis for free! Leverage, if you have any reservations about borrowing hard money to buy real estate, you need to overcome that and get a better understanding of leverage. Using borrowed money vastly improves your chances of earning bigger profits.
Now, for a lot of Americans, getting rid of their mortgage debt early is the real American dream. Now, for a lot of home owners, not having that payment would make life A LOT easier.
Most real estate investors, however, owning their properties free and clear means that valuable equity is tied up in those properties — equity they can use to fund the purchase of other revenue generating properties! Don’t get stuck in the mindset of thinking that paying off a real estate investment property is a smart move. iFundRehabs provides clients with MANY different equity cash out options such as; investment property equity cash out, owner occupied equity cash out (for business purpose only) and portfolio cash outs (1-4+ properties).
Maximizing Your Potential with Other People’s Money
Other people’s money (or OPM) is money that you borrow from another person or company to fund your investments. OPM isn’t a trade secret. If you own a home, you more than likely used OPM to purchase it. You probably put 5-10% of your own money down for the down payment and borrowed the rest.
In 90%+ cases, OPM helps investors earn profit. When calculating the appreciate of the property, the tax benefits (savings) it represents, inflation costs, and other factors, you are VERY likely to earn more money from the property than you would pay out in interest over the span of the loan.
The same can be said for your real estate investments. The more OPM you can acquire to work for you, the more profit you will ultimately make — as long as those earnings exceed the cost of borrowing it. Case in point, in the world of real estate, cash is king and the buyer who shows up with that cash will have a significantly stronger position to purchase.
Looking at Loan-to-Value (LTV)
When talking about Loan-to-Value, LTV is the ratio of the loan total to the appraised value of the property. If you’re purchasing a $400,000 property with $80,000 down and applying for a $320,000 loan, the LTV would be
$320,00 / $400,000 = 80% LTV
Generally speaking, most lenders want to see lower LTV’s for investment properties than for homes since a lower LTV provides more of a cushion to cover the risks that comes with investment properties.
Difference between Investment and Home Financing
So, as most successful investors know, your first investment property SHOULD be the home you live in. If you don’t currently own a home and plan to start real estate investing, it may be a little more difficult starting out as you may not have any idea of the mortgage loan application process. The difference between investment and home financing can be summed up into two things — 1. Speed. Investment financing is WAY quicker than a traditional mortgage loan. 2. Cost. Depending on the situation, either one can be more expensive, but that all depends on MANY different factors.
Generating a Business Plan
Most often than not, real estate investors scorn the idea of creating a business plan — an outlined presentation on how an investor plans to purchase a specific home and earn a good ROI. Again, most investors just want to buy / sell / rent properties and much a bunch of money — that’s the plan! Investors don’t tend to think of themselves as white collar pencil pushers. If they feel the property is a GOOD investment, that’s good enough for them.
This is a false image that most people have of investors. In today’s world, the most prosperous investors, however, do the math. They will crunch the numbers. If those numbers don’t work, they will kill that deal. Bottom line, always do your homework!
Covering Your Assets from Investment Risks
The silly thing about lenders — when you borrow money from us, we expect you to pay us back. To make sure this happens, we typically require that you sign a promissory note and a mortgage or deed of trust. A promissory note is your personal promise to repay the loan in full. The deed of trust or mortgage names certain property as collateral for the loan.
If for whatever reason you cannot pay back the loan (default), the lender has the right to foreclose (sell property at auction to highest bidder). If the lender cannot sell the property for as much as you owe, they may be able to sue for the difference.
As all smart investors know, you want to limit the amount of personal assets that the lender has the right to seize for defaulting. For example, if you don’t make the payments on a loan on an investment property you want to make sure that the lender can’t take the home you are currently living in. You also want to shield yourself from taking your other assets such as businesses you own, or other assets, such as your vehicle.
Understanding Why You Need to Protect Your Personal Assets
When you become an investor, you are now a small biz owner, but you are also an individual who may have a spouse and a family to support. You more than likely have a home, a vehicle, a few bank accounts, one or more retirement accounts and other valuables you’ve worked very hard to acquire. Now you want to build even MORE wealth from investing in real-estate, you’re willing to take some risks but are you able to live with losing everything you have now?
The correct answer should be, “no”. You should never risk everything that you own to invest in real estate. Why? Here are two good reasons:
- You should never want to or have to risk everything you own. You can always protect most or all of your assets from risk by obtaining an LLC.
- If your investment flops, you can recover much more quickly and even pursue future investments by holding on to more of your current assets.
With any investment’s’ you should limit your exposure (both financially and emotionally) to the individual deal. This is because you are investing both your time, skills and maybe some of your own funds. Furthermore, you’re the one who is taking on the burden of managing the investment, dealing with issues, and worrying about whether your project is going to turn an ROI. The lender is the one putting up all the funds for your project, so let us take the financial risk!
If you would like more information on what it takes to get funding, please contact us today!