Real estate is among the most valuable, tangible assets in the world.
So don’t believe the hype sold to you on those late-night infomercials that can be possessed for free.
When you do a slight bit of scratching under the surface – or defining the term “free,” you’ll quickly discover that pretty sophisticated financing options are being utilized in order to take ownership of properties.
We are going to look at some of the most common methods of financing real estate for investors who wish to build your portfolio quickly.
There are various types of real estate that you may be looking to buy. Single family or multi-family homes are the most common.
There’s also commercial, industrial, raw land, mini-storage units, and other types of real estate that can make great investments.
But if you’re a real estate investor looking to purchase a $300,000 single family home to flip, where are you going to come up with all that dough?
This series will explore the most common real estate investment financing options that every investor should know about.
1. All Cash
That’s right, some real estate investors are able to show up to the table with 100% cash to purchase the property of interest outright.
In fact, a study conducted by Memphis Invest and BiggerPockets found that 24 percent of U.S. investors use their own cash to finance real estate investments.
This doesn’t mean that they show up to the title company with briefcases full of cash – Cocaine Cowboy style.
They actually bring a check – either by certified funds, like a bank cashier’s check – and the title company writes a check to the seller. Another common form of payment is through a wire transfer from the bank.
As you might imagine, this is the cleanest, simplest way to finance real estate for all parties involved.
However, one drawback to investors who put down 100 percent of the investment into a single deal is that they sacrifice the potential of higher returns.
I’ll give you an example to illustrate the point.
Example: Let’s say that Mary has a little lamb…no, wrong blog. Seriously, Mary has $100,000 to invest. If she decides to buy one house for $100,000, in full, she will have sank 100% of her investment money into a property.
Let’s say that she earns $1,000 a month in rent, or $12,000 a year in income. That translates into a 12 percent return on investment.
Now, let’s say that Mary decides to use her $100,000 to purchase 5 homes by putting down 20 percent on each and financing the rest of them.
Each house would then have an $80,000 mortgage, so she would be left with a positive cash flow of around $300 a month on each home – or $1,500 in total per month. In theory, this would be a 50 perfect higher return on investment per year.
Or would it?
I ask this question because conventional, street-savvy, young-and-hungry wiz-kids sell this scenario this way. But the reality is that with 5 homes instead of just one, Mary has 5 times the headaches that she would have had if she just had one property.
Maintenance costs on five properties, insurance costs, utilities, tenant issues, taxes, renovations, labor and/or staff required to run a bigger operation, and the list goes on.
Once you factor in real costs that these additional properties would incur, Mary may realize she would have had an easier life, and roughly the same bottom-line ROI if she chooses to put 100% down on just one property instead of the five property deal.
Next time we’ll look at the other financing options that every real estate investor should know about.
Why not hire Utz Property Management to take care of the job for you?
You can start by scheduling your PROPERTY PROFITS STRATEGY SESSION.
In This FREE 1 Hour Session, an expert real estate investment coach from our team will work personally with you to...
- Examine your current real estate investment portfolio/plans to see what’s working and what’s hurting. Discover where you’re making money and losing it.
- Search for the diamonds in your backyard, the low-hanging profit opportunities that can be made with minor tweaks.
- Diagnose the biggest roadblock to scaling your business fast and profitably.
- Present the best path for tweaking your investment game-plan so you can build wealth faster, with more predictability and stability.