Real Estate is a long-term finance and management proposition.
You must be an efficient manager for your properties if you’re going to be a successful investor, but equally important, you need to secure a trusted source of financing.
Less money down equals more deals, more equity, more net worth, and more cash flow.
If you are just starting out in the investment world, the first source of financing you may think of is conventional, bank finance. That’s what you’ve secured for your primary residence, and it might be all you know. Especially if you’re new to this field. Conventional financing has perks, but not always for investing.
Let me explain the difference between conventional and private money.
As you may know, bank financing typically requires a down payment based on the appraised value of the home or the purchase price, whichever is lower. This doesn’t give you an advantage when buying a distressed home, and they’re not going to loan you money for repairs. All that additional cost will come out of pocket. This means that your investment into the real estate transaction is the down payment (up to 20%), the closing costs, and the bill for repairs.
**Let’s say you have a property for purchase at $55,000 that needs $20,000 in repairs to have an ARV (after repair value) of $100,000.**
Bank advantages; low-interest rate, long-term financing
Bank disadvantages; they require an inspection.
If the house needs $20,000 in repairs, the bank is not going to loan out the money until the repairs are done. You can go to the owners and request they do this for you, which isn’t likely going to happen. And if you’re buying the property as a foreclosure, that’s definitely not going to happen. Also, banks won’t allow double closes or assignments, so when you get a deal from a wholesaler or flipper wanting to assign the property to you, the bank isn’t going to allow it. This excludes many potential deals.
Now, let’s say you can get over all of this. Here’s the worst disadvantage for turning to a conventional loan for a distressed property; it can take 30-60 days to close. When you’re buying these properties from motivated sellers or from banks that want to get rid of the asset, time will kill the deal. A motivated seller will take a lower offer if you can assure them the property will close in, say, ten days.
Bottom line for this example; if you’re able to secure a bank loan for a distressed property, you’re looking at a 55% ROI. Not bad.
Now, let’s talk about private money, which comes from a private source specifically for real estate investors.
In contrast to a bank loan, these loans have a higher interest rate and a shorter-term loan, as they are designed specifically for short term investments. A private money lender knows the property could be in rough, distressed shape, and that’s okay. The cost of the repairs can be covered in the loan, which means no out of pocket from you for the rehab of the property. The biggest advantage–contrasting of course with the long process of a bank loan–is that a private money lender will close on the property in as little as a few days. This strengthens your offer, giving you an advantage over other interested parties who have bank financing.
Private money lenders will loan based on the ARV and not based on the purchase price. The lower you buy the property for, the less you’ll bring to the table. Less money down gives you the opportunity to do more deals, which is more opportunity for profit.
If you turn to a Private Money Loan for this example, your ROI jumps from 55% to 200%. Which would you choose?
Each finance option serves a purpose, but if you’re investing (and especially if you’re flipping), get a fast quote from CogoCapital.com. For more, check out: Cogo Capital _ Private Money For For Real Estate Investors
To Your Success;
Lee A. Arnold
The Lee Arnold System of Real Estate Investing
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