Funding the Last bit
You know what really stops real estate investors from making a fortune. It’s not finding most of the funding for a deal–it’s finding that last bit. For example, almost anybody can get an 80% LTV mortgage. But the next 20%–there’s the rub.
Oh and you “subject to” investors where the seller is giving you their house or apartment? Isn’t it true that more often then not, there’s additional cash required for mortgage arrearage the seller left you with, or minor (sometimes major) repairs, other liens, marketing expenses, etc? You can easily go broke doing subject to deals without an additional source of money.
There are actually quite a few other sources of money, and they work quite well with primary funding strategies like institutional loans. I call it, the multiple funding strategy. These days with credit tighting, institutions lowering the loan to value ratios they’ll fund, and looking for more security from the investor, a multiple funding strategy is practically a necessity.
This is an especially good strategy to use with private lenders who expect a high return on their investment (20%+). Just do the math. If you use an investor’s money to buy a house worth $200,000. And let’s say you end up paying $160,000 for acquisition, repairs, etc. You put a tenant in the house for 3 years on a lease option which the tenant exercises for $230,000.
Okay, your profit is approx $70,000. However, if your investor put up the entire $160,000, what’s his return if you gave him the entire profit? It’s about 44%–that’s over 3 years. The investor’s annual return is only 14.5%. If the investor expected 20%, he’d be pretty disappointed.
And what do you get in this scenario? Just the cashflow from the property. Now with no mortgage, let’s say that’s about $1000/mo. You net $36,000. However, if you owed the investor the 20%/y interest, $26K would come out of your share to the investor, netting you only $10,000.
Now compare the same scenario with getting an 80% institutional loan at 7% for the $160,000 purchase price. Now, you’d only have to borrow $32,000 from the investor. 3 years at 20% would amount to $19,200. The investor is happy, and you’d net $50,800, plus the net cashflow from the property!
Which scenario would you prefer?
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Richard Odessey has been investing in Real Estate since 1999 and have bought, managed and sold over $5MM in assets over that time period. He has created a national network of RE investors that are a source of continual on-the-ground intelligence. Richard has also developed unique and proprietary tools to zero in on only high profit-low risk transactions.
