10 Dec 14 Mistakes New Real Estate Investors Make: Part 5
Hey guys, thanks for joining me again on another real estate vlog. We have a real passion at Wealthbuilders to help Kingdom-minded entrepreneurs and investors to make sense of making money for making a difference. So as we talk about real estate, we’re talking about how do you approach your real estate business and make money in real estate. We’ve been showing you 14 common mistakes new real estate investors make. Today, we’ll talk about Mistake #7.
Mistake #7: Failing to Establish Multiple Sources of Financing.
One of the biggest things that people do not understand about real estate is that real estate is as much about financing as it is any other part of business. It doesn’t matter what business you go into, money is always a big deal. But in real estate, it’s crucial. One reason for that is that you really make money in real estate because of leverage. I’ve owned many properties that are paid off and debt free, but the most money I ever made was when those properties were leveraged. That means that those properties still had debt.
Take $10,000 and put it down on a $100,000 house and say we have a good year. In fact, in Denver last year we had a great year. We had appreciation of properties that was 12%! Well, 12% on $100,000 property is a 120% return per annum on that $10,000 downpayment. That’s why real estate is really about financing.
So let’s talk about mortgages. Typically, where we’ve been in the current environment, you can’t have more than 4 mortgages in your name. Now if you’re married, you can have 4 and your spouse can have 4, so you can do a total of 8 properties. But I just heard recently from some pretty well-established mortgage brokers that Freddie Mac and Fannie Mae have just loosened the policies up some and are allowing some buyers to buy 10 mortgages. That means if you’re married, you could have 20 properties!
You’ll have to verify in your area what exactly the limits are. But Freddie and Fannie are national so that could apply to any state.
This is why it’s important to make sure you’re finding at least 2-3 mortgage brokers or loan officers that will work with you. A mortgage broker is typically someone that’s in a mortgage broker shop and a loan officer is typically someone who is in a bank.
Here’s something that’s worth the price of the ticket. Most loan officers in banks, when they’re lending you money on a property, they’re not doing any differently than what a mortgage broker would do. They’re simply underwriting that loan based on the Fannie and Freddie criteria and rules. They have a piece of software that they use to do a pre-qualification. The point is, when you go to most banks, they’re writing the same as a mortgage broker—unless you get a portfolio loan.
Then, it’s important for you to find 2-3 bankers. Find at least 2 banks that are interested in lending on real estate. When you walk into most banks once you get up to your limit of properties, you have to say to them, “Look, I have 4 properties already, so what I’m looking for is a loan that you would loan me out of your own funds here in the bank and service the loan here in the bank.” That way, they’re not selling the paper to Freddie or Fannie. They’re not selling that loan, they’re holding that loan in the bank. Many banks will do this and you’re not limited to the number of properties. Then most loan officers will limit you to around $500,000-$1,000,000 on properties. It’s going to take you a while to get that established.
So make sure you find a couple of banks, 2-3, that will help you with that. They will start loaning to you based on your business, not just on your credit score. Your credit score will matter, but they will look at how well are you running your business and if you know what you’re doing. Then they feel safe, because they’re going to lend to you based on their loan-to-value criteria and based on the appraisal of the house.
The last thing I want to say, especially at the mortgage level, is know your credit score. Make sure you’re managing your credit score in a positive way. I’ll tell you in some other videos how to do that, but make sure you start.
If you have any questions, leave them in the comment section, and also make sure that you like, comment and share. If you don’t have a question, just let me know you’re here so that I know you’re watching! I appreciate you tuning in to the vlog. I’ll see you here in another week or so.
Join me every Thursday for more real estate tips.