3 Good Reasons Not to Over-Finance Your Propertiesby Vena Jones-Cox

With the advent of 90%-100% LAV loans on investment properties, many investors are taking the opportunity to finance or refinance their properties at a higher percentage of value than normal. Many are taking cash out at the closing, and many are choosing to pay close to retail for properties that qualify for this financing, on the theory that a no money down deal is a good deal, even if it only cash flows a little. Smart investors avoid the temptation (and the strong come-ons by mortgage brokers) to do this. Here’s why:

1. You can’t “dump” properties in an emergency. I get calls from landlords in this position literally every day. Like from a guy who paid $78K (full value) for a rental last summer and got a purchase money loan for $76K. Now his tenants are driving him crazy and destroying the place, and he wants to sell now. He can’t sell to an investor, because he’s over-leveraged, and he can’t sell to a homeowner, because his tenants have destroyed the house. Or from the lady who bought a $100,000 duplex for $59,000…but then got a 2nd mortgage for another $50,000. She took cash out, spent it, and now can’t afford to sell the pain-in-the-rear property.

2. You can’t get consistent cash flow. I got a call yesterday from the owner of a 3 family who got a 2nd mortgage a few years ago to take some cash out. Now the city’s on his back and he wants to sell…but the 2 payments total more than the property would gross fully rented. Unless he pays off the 2nd of $20K, he won’t be able to sell.

3. You’ll pay an arm and a leg in the long term. Check out the difference in total interest payments between a property financed at 80% of it’s value vs. 100%, and you’ll see what I mean.

There’s nothing wrong with having no money in a property—as long as your total debt is less than 80% of the retail value. Borrowing more may make you feel richer in the short term, but it’s a recipe for disaster.

Add Comment

Are There Good Deals in a Hot Market?by Vena Jones-Cox
04/01/20140 Comments

Q: I live in a market that’s so hot that houses go on the market and get a close-to-full-price offer in less than a week. I can’t buy properties here for less than full value, and no one is willing to carry terms, since there are thousands of qualified buyers looking for houses. Do I just wait for the market to slow down, or what? S.R, Philadelphia

A: We all live in the market you describe, and have for a long time. The National Association of Realtors has been reporting record-setting sales for three years; mortgage money is plentiful; anyone who wants to work is fully employed in the tightest labor market this century. These factors add up to enormous competition among potential homeowners for properties in nearly every price range. Competition drives up prices, and a “seller’s market” results.
Yet, at the same time, real estate investors are buying properties for pennies on the dollar, negotiating low money-down seller financing, and generally prospering along with everybody else. Why are others making deals when you aren’t? I’d like to suggest that a large part of the reason might be that you’re looking at the wrong properties, and don’t have enough strategies in play for finding the right ones.

Obviously, a seller who has a nice-looking house in a decent neighborhood and months to sell is not going to agree to your 70% offer or carry sweet financing terms. Why should they? Your competition for this type of property—the homeowner wannabe—is ALWAYS going to outbid you, because they buy for different reasons (school system, aesthetics, love of the zip code) than you do. These sellers are always the most readily identifiable, since they generally list with agents, or at least put a “For Sale by Owner” sign in the yard. However, the obvious sellers are not the ones that the professional real estate investor in this type of market looks to deal with. Despite the good economic times, and despite the fact that many properties are selling for 100% or more of asking price within 30 days, there are still sellers out there with problems that make it impossible to sell quickly (or at least quickly enough to meet the seller’s needs!) or for full price. It’s these sellers that you need to work with, because, in solving their problems, you will be able to make a profit from their properties.

Don’t expect to find these folks through the multiple listing service. While the MLS is still my favorite way to find junker properties to flip, anything in half-decent shape is being aggressively marketed by agents to homeowner and investor clients. Instead, run ads. Distribute flyers. Write letters to people who have estate properties. Find ways to reach these sellers and let them know that you can help them. My last 4 deals involved 2 estates, a divorce, and a frustrated landlord, and were purchased via a loan assumption, a land contract, and two cash offers at 60% of value. Three of the 4 came from calls on an ad in the paper; the fourth was a referral from another investor. Investors in my market— even those with years of experience—have complained to me about the same situation you describe. Yet they’re still making deals. So maybe it’s a little tougher to find cooperative sellers than it was 10 years ago; as in every business, you just adapt your methods to the market. And by the way, things are slowing down. Interest rates are up, mortgage brokers are laying off salespeople, foreclosure rates are accelerating, and every major lender is opening a “short sale” department to negotiate lower payoffs on defaulted mortgages. There—that’s all the hint I’m giving you. Now get out there and make some deals!