Most of you that read my blogs regularly understand that I am not a big fan of selling real estate. I sincerely believe the true profits in real estate are made when you hold that real estate long-term and use an ongoing refinance strategy to pull often tax free cash and invest it in other parts of your portfolio.
Whether you are buying real estate to eventually re-sell or you are buying real estate to hold forever, I can assure you of one thing. Your profits in any real estate transaction will be determined on the price and terms of your acquisition.
Notice that I say “price and terms” of acquisition. Most real estate investors completely miss this piece. Let me give you an example.
In the world of investment real estate (with single family homes) currently, financing 90% of the purchase price is almost impossible. Doing so without being required to buy mortgage insurance is unheard of. I closed two such packages for my clients yesterday and they were at market rates with a couple of years negative amortization to boot.
Now, they also purchased the properties at a substantial discount to market value. I will suggest to you that the financing terms in these deals were even more important than the discount to market value.
There are a number of very effective ways to receive attractive terms. Certainly, the world of Non-Traditional Real Estate that I practice and teach in is one. There are many ways in the traditional world of real estate. Let me give you some examples.
Having the Seller pay the closing costs is a basic. They will almost always do it and that significantly reduces the cash you have in a deal and permanently increases your cash on cash return on investment. Another is seller financing. In today’s market this is almost always available. It is just that most sellers don’t ask and most real estate agents don’t either. Let me give you some examples.
Let’s say the market interest rate is 7% and if you went from 80% of purchase price to 90% of purchase price you would incur $100.00 per month in mortgage insurance. If the seller provides you financing on 10% (which doesn’t take any cash on their part and likely increases slightly the purchase price), you are $100.00 or more ahead every month. Further you cut in half the cash you have in the deal and your eventual cash on cash return on investment base.
What if the seller required no payments for a year? Or two years? Or FIVE years???
What if there was no interest on the loan?
All of these things are possible and typically they simply require someone asking for it.
Would you rather buy a $200,000.00 investment property with $20,000.00 down and $8,000.00 in closing costs or would you prefer to put $40,000.00 down with even greater closing costs. Do you really need to pay mortgage insurance?
Folks, it is all about the TERMS!
