Lining Up Your Finances in Real Estate

Image Credit

Will the seller finance my purchase?

One of the best ways for an investor to finance real estate is to have the seller carry some or all of the "paper." In effect, the seller gives the buyer a loan to help make the purchase. While this has become a rarity in most residential real estate, it's still fairly common practice in many areas of the country where commercial real estate and land is sold. Seller financing has many advantages:

• There's no trouble getting funding. The seller simply carries back the loan.
• Frequently it's easier qualifying. Many sellers, anxious to make a sale, will overlook some credit blemishes that an institutional lender might balk at.
• The interest rate is negotiable, depending on how eager the seller is to dispose of the property.
• There are no points. Most sellers simply don't think in the same terms that lenders do.

How do I arrange seller financing?

It's usually arranged at the time you make your purchase offer. You put into the purchase offer a contingency that the sale is subject to your obtaining a mortgage from the seller. Of course, you include the desired interest rate, term, and so forth. In other words, you make the deal contingent upon your obtaining seller financing. If the seller won't give it to you, there's no deal. Make the price good enough, and any seller will at least seriously consider the offer.

Image Credit

How do I get cash out?

Cashing out usually, but not always, occurs after you own the property. It means getting a mortgage that not only pays off your existing financing, but also cashes in some of your equity. In the past, this was the single most difficult problem for investors. Today it's easier. In many cases you can get an 80 percent mortgage, including cash back to you. In some cases, 90 percent is available with cash back on a refinancing. But you do have to search around. Again, you'll probably pay a stiffer interest rate and more points, and you will need more personal income to qualify. But at least the financing is there.

Can I get a second mortgage?

Generally speaking, the combined loan-to-value (CLTV) ratio for a second mortgage is the same as it would be for a large first mortgage: 80 to 90 percent. However, the higher interest rate and points usually apply only to the second mortgage, not the first. When this type of second mortgage is paired with a lower-interest-rate first mortgage, the combined interest rate sometimes can be lower than it would be for a single large new refinanced mortgage. There are also private investors who will give you cash out. However, they tend to charge much higher interest rates, and the loans tend to be for a much shorter term.

Can I get financing based on my other assets?

Yet another type of financing is to borrow not on the property you are buying, but on other property such as stocks or bonds that you already own. The advantage in securing this type of financing is that you can obtain loans at very low interest rates, often through stockbrokers and banks. Banks sometimes offer these loans to investors. Experienced real estate investors also frequently borrow on property they already own in order to make a new purchase. For example, you may have an apartment building that you bought several years ago and in which you have substantial equity. You refinance this property and use the funds to buy a new property. The assets you use can be almost anything. You need a creative banker or mortgage lender to handle this type of financing.

Can I get relatives to help out?

When they start out, many investors do. They go to either parents, brothers, sisters, or anyone else they feel they can tap for a loan. Ideally it would be a personal loan, but sometimes the relative will insist on having a mortgage on the property or an interest in it. You have to judge whether the money you're getting warrants the equity you're giving away. Another method is to share ownership. Typically you'll handle the management of the property, and when it's time to sell, the family will split up the profits. This system, of course, is not limited to families. It will work with friends or even perfect strangers. However, a word of caution: put everything in writing. People, even close relatives, often forget what was said months or years earlier. When it's time to sell, you want to have in writing exactly how the profits (or if something goes wrong, the losses) are to be split up. Further, you want to be sure that there are solid escape clauses allowing you, or another party, to exit the deal if situations change. (For example, you could lose your job, or your sibling, friend, son or daughter could need to move out of the area.) And remember, relatives never forget ... and many never forgive if anything goes wrong.