Not long ago I was having an in-depth conversation with one of my friends on the topic of Real Estate Investing. You see, my friend is a real estate investor who thinks like a real estate investor. His claim was that he liked to make money by using other people’s money (OPM). I can’t fault him for that. That’s how banks, insurance companies, and other financial institutions make money. So, why not use this concept for personal gains?
Reality is that during today’s lending climate the chances of getting that desirable 100% financing are rare, if any. That is, of course, when it comes to mortgages. Mortgages are secured by residential or commercial property. The smart underwriters assessing the loan risk know that we’re still in a deflationary stage. That’s why they want to cover their backs. They want to see some serious “skin in the game” from the borrower. So, credit worthiness and deal projection are certainly not sufficient anymore to justify any lender in its right mind to take on 100% of the risk.
At the same time, I know there are a lot of you out there who have found the “golden opportunity” yet lack the funding. So, I’m sharing with you the experience of one of my clients who was referred to me by my favorite realtor. If this may apply to you or a client of yours…great, just send me an e-mail. If not, just keep it in your “knowledge tool box” and use it when and if the opportunity may come your way.
My client wants to buy what he considers an incredible deal. For him the deal is the sum of multiple distressed residential property. He wants to buy them, do some cosmetic work, and re-sale for a profit. He also happens to be in an area where there is now competition for nice properties from potential owner occupant buyers.
So, let’s see what his options are. He tried his local bank on previous deals without luck. He even tried a mortgage broker but again, there was no conventional solution. Here are his most viable solutions to his problem.
1. His own cash. Yes, he has the cash in the bank but he’s no Donald Trump. One million dollar is a lot of money for him. It means he’d have to use most of his reserves on this deal. He passed on this option.
2. Hard Money mortgage loan. The active hard money lenders require anywhere between thirty five to fifty percent or more from the borrower to minimize their risk. Otherwise, they won’t lend. A lot of folks fail to understand that lenders are NOT in the business of real estate. In case of default, they don’t want to renovate, repair, or find tenants to act as landlords. They want to discard the property quick and to sell it right away the price must be low. If they lend 100% or even slightly lower percentages they are stuck with a nonperforming and overpriced property.
My client decided to pass on this option. He wasn’t interested in using a substantial portion of his cash assets nor was he interested in getting hard money financing at 12% rate. To him that was not the answer.
3. Financing secured by securities. My client is a rather sophisticated guy, he doesn’t have all his eggs in one basket. That’s why he did well all his life. While assessing his PFS (Personal Financial Statement) I discovered he was invested in about $1.5M worth of Apple shares. And that is where the answer was laying. A loan of $1M secured by his securities portfolio for three years at a fixed rate of 3.25%. And no, he wouldn’t have to give up his gains and/or dividends from his Apple stock.
He asked me what the catch was and I told him. When he found out he wasn’t allowed to prepay his loan for three years he was quite excited. If you’re in the smart investor frame of mind you’ll know why.
As savvy as my client is, it is obvious he didn’t know about this inconspicuous kind of financing. That proves that no matter how successful some folks are they are humble enough to know there’s more to learn and smart enough to know where to look.
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