When it comes to real estate investing, it is much more efficient if you have some of your own money. The power to negotiate with someone when you are purchasing a property is much greater when they know you actually have the money to buy it. You don’t have to spend all your time finding creative financing. Instead, you just go in, make the offer and negotiate on value. I call it value investing in real estate. You negotiate and try to get the best price you can for the property.
You make money when you buy
In real estate, you make money when you buy–not when you sell. Not understanding that is one of the biggest mistakes real estate investors make. You always want to buy a property at a lower cost than what it’s worth. I’m convinced of that. I’ve done real estate a couple of different ways, like where I’ve bought on terms instead of price.
But I can tell you from experience that the safest way to grow your investment the best is to buy your property with cash from a loan. This is why it’s so important to understand real estate finance and to understand how to keep the money you have moving. You should also develop relationships with a mortgage banker and a mortgage broker.
80 cents on the dollar
It’s therefore important to understand how to come up with a down payment. I always want to buy real estate at 80 cents on the dollar. In some cases, I’ll purchase property at 60 or 70 cents on the dollar. But the safest place to be is no more than 80. To clarify, that’s 80% of the real value of the property, even after repairs.
When you’re at 80%, this means you have 20% equity going into that property. So you’re in pretty good shape if, a little later, you want to re-finance. Or even if you just want to hold it and pay it down. Regardless, you’re still in good shape.
What’s important there is that you have to do a purchase mortgage. And on the purchase mortgage you’ll have to have a downpayment. What I recommend is that you buy a property with 10% down. In some cases you can do it with 5%, I know investors who do it all the time. And if you have a really strong credit score there is actually 100% financing that is available.
In 100% case, they typically will do what’s called a 70-30 loan, or a 70-25. That means for the first mortgage they’ll loan you 75% of the purchase price of the property, and then you’ll get a second mortgage at typically a much higher interest rate that is for 25%. You literally have a 100% on the loan. But be aware that you will still have to have some money for closing costs.
Negotiate with power
The point I want to make to you is that you are in a whole lot stronger position negotiating and personally if you actually are able to bring a little money to the table.
Most lenders will want to see that you have six months of cash reserves of the mortgage payment–principal interest, taxes and insurance. They like to see that liquid in the bank. So if your mortgage payment is $1,000 a month, they like to see $6,000 liquid in the bank plus whatever the downpayment is you’ve arranged. For example, on a $100k house you would need $10,000 for your downpayment plus $6,000 in reserve.
Now two ways to raise a downpayment are through Liquid Assets (Cash, Stocks, Bonds, Insurance) and your Relatives/Friends. But join me next week for three detailed ways to raise a downpayment!
Please let me know any of your questions about downpayment and loans in the comment section below!
Join me next week to discuss how to raise a downpayment!