Week 5: What are the best ways to finance real estate?
Financing properties is almost as important as finding great deals. The more of other people’s money you can use, they more deals you can do and the more money you can make. However, you have to be careful what type of financing you are using so that you are maximizing your returns. There are usually sweet spots where it makes sense to use a mix of your own money and financing. Use too much financing and you will pay too high of rates. Use too much of your own money and it will limit how many deals you can do.
Goals for this module:
- Determine if you are using the right financing now
- Find portfolio lenders in your area
- Maximize conventional financing options
- Research national versus local portfolio lenders
- Learn about Hard Money options and if it makes sense
1. Is cash really a safer way to invest?
I use financing for almost all of my investments. Over the years I have used more and more financing. But, many people feel real estate is risky and using all cash will mitigate that risk. I could not disagree more. Check out the video below to see my full take on financing versus cash.
Real estate is a numbers game. I like to maximize the amount of money I make while minimizing the risk. There is no right answer on just how much debt you can safely carry. Your first task for this module is to think about how much debt you are comfortable with when buying rental properties. I want you to think about loan to current value, not what you paid, but what the house is worth now.
2. How to use conventional mortgages for investing
Conventional mortgages can be a great option when first buying rentals or even a personal residence. You can get 30 year fixed rate mortgages at awesome rates.
When you buy a personal residence you have to make sure you are not jeopardizing your investing. Lenders and agents may try to convince you to buy the most expensive house you can qualify for, but this is not a wise move! Debt to income ratios are also extremely important and it may not be smart to deduct every thing you possibly can for taxes if it means you show no income.
3. How to use portfolio lending for investments
Portfolio lenders will make your life so much easier as an investor. My portfolio lender makes it easier to invest in rentals and flips. They are not impossible to find if you know where to look and what to ask.
Current national portfolio lenders:
- Lima Capital
- Jordan Financial Capital
- First Key Lending
- Colony Capital
The first three companies on this list offer 30 year fixed loan opportunities. If you are interested in speaking with any of the companies, please send me an email and I will be happy to make an introduction.
The main task for this entire module is finding a portfolio lender. Even if you already have a great lender, call or email local banks and ask them what programs they offer for investors who are flippers or rental property owners. Here are some key points when contacting banks.
- Contact local banks or credit unions
- Ask for the commercial lending department or business banking department
- Make sure you paint the picture of an experienced investor who has done many deals
- Bankers love to have lunch or meet in person and they even pay for it! Be willing to meet them to talk about your business and plans
- Have specific goals in mind for how many deals you want to in the next year
- Ask them about seasoning periods, if they ever sell their loans, what terms they offer (amortizations, fixed or ARMs, loan to value, interest, points, etc.)
- The more they like you, the better the terms get. If you can refer them business they like you even more!
Local portfolio lenders that I am familiar with:
Colorado: First Bank, Bank of Colorado, Fort Morgan State Bank, Windsor State Bank
California: Bank of Stockton (this also happens to be the lender for my Lamborghini)
Texas: Jefferson Bank
4. Hard Money
Hard money is almost a dirty word on some circles of the investing world, but it can be very useful. Hard money is expensive, but if it allows you to buy more properties with less cash, that make you more money, that is a good thing.
I don’t use hard money, but that does not mean it is not a viable option for many investors. The really good news is that hard money is getting cheaper. Here are some companies with hard money in the 11 to 12 percent range with less tan four points paid.
- Lima Capital
- Jordan Financial Capital
- Sherman Bridge
Yes, some of these companies are the same national portfolio lenders I listed above. From what I have seen, they have the best hard money programs out there. The same applies for hard money as it does for portfolio money. They more they like you, the better terms you will get. The more deals you do with them, the better your terms will get as well.