By George Riley

When it comes to the financing of investment properties, there are many methods and combinations of methods - almost as many as there are deals. Some you're no doubt familiar with; others may be new to you. Read on for an overview of your investment financing options.

The first approach that comes to mind of course, is the old fashioned way of financing: the investor makes an offer on a property and seeks a conventional mortgage, usually putting up a cash down payment of up to 30% of the purchase price. Most sellers want to sell to a cash buyer in this traditional way, and do not have sufficient motivation to want to enter into a more creative, and perceptively more risky, deal.

From the investor's perspective however, this traditional approach has a number of drawbacks:

• The investor has to endure a mortgage broker's application process and credit check.
• The investor must tie up many thousands of dollars with the down payment - an important consideration in a process that can take weeks to go from application to closing.
• The investor may need to divulge personal or business income.
• The investor may have personal credit exposure and liability.
• When buying multi-unit residential, rental income and ownership expenses enter the mix. (Note: These can and should be carefully analyzed before applying for a loan. A more favorable mortgage rate can be had if the investor also intends on becoming an occupant. Be sure to get a referral for a mortgage broker who has a reputation for following through in a timely manner.)

Personally, and for the reasons listed above, I prefer more creative ways of financing investment properties. The goal of creative financing is straightforward: Satisfy the seller's needs while minimizing the investor's credit exposure and the hassles inherent in traditional borrowing. There are many tactics an investor can employ that are completely legal, moral and ethical.

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Some examples. . .

1. Do an all cash deal The easiest deal - but not always the smartest - is when the investor is an all cash buyer. In this case, you literally pay 100% of the purchase price with your own cash. The advantage of course, is that you can close very quickly and don't need to involve lenders or partners of any kind. Credit scores, loan applications, income disclosures, partnership agreements and all the inherent delays (usually on the mortgage broker's side) are not part of the cash transaction.
   
   That said, it is the rare investor who can, or wants to, put their cash liquidity on the line. Readily available cash can be put to better use! An all-cash buyer's source of funds might be from personal savings, or more likely from equity drawn from other property already owned. It is probably wisest to not liquidate for cash unless you have a truly sweet deal in hand ... one that is certain to produce huge profits quickly.

2. Make the seller your partner. By allowing the owner to participate in your plan to create and extract equity from their property, you may need less of your own money to put the deal together. (Partnering with the seller begins by establishing a trusting relationship ... and honesty is paramount to your success. NEVER lie or mislead anyone on your plan or your intentions of the outcome ... let the seller know that you are working with her for your mutual gain.)
   
   Keep in mind that the seller is much more likely to work with you on a creative deal if you are able to demonstrate the benefits to her of such an agreement. Ideally she will hold a note for the entire purchase price (the ideal "nothing down" tactic). Typically however, to get the deal done you will need to offer a cash down payment, with her holding a note for the balance. With this arrangement, your seller, in effect, becomes your lender.
   
   (See our next article, "Seller Financing - An Attractive Option to Traditional Methods," for a more in-depth look at seller financing)

3. Use OPM - Other People's Money. In general, I recommend borrowing as much as possible from private investors whenever you can. Build relationships within your investor group, and be aware of who has money to lend, and what type of deal and terms they would be interested in. If you borrow from a private party, and sufficient equity is available in the target property, guarantee your private lender's loan by giving him a mortgage, which will be paid off when the property is transferred to a new buyer. Offer your private lender a fair return for his cash and his risk ... greed will not get the deal done. Remember, you are in this for the gain of all parties.

4. Borrow from a "hard money" lender. It's called "hard money" because it's easy to borrow, but hard to pay back, due to the higher interest rate and shorter terms. In this approach, the buyer/investor must have some "skin in the game" - some of your own money or other collateral. Typical hard money can be borrowed for 1-2 points up front and 18% interest.
   
   A recent conversation with a local hard money lender revealed that the investor will pay 4 points upon receipt of the loan, and make interest only payments at 14% for a one year term, with principal due by the end of the term. Some hard money lenders specialize in rehab loans. The rehab lenders have a reputation for understanding and meeting the rehab/investor needs. As you establish a relationship with a particular lender, borrowing becomes easier.

These are just a few of the ideas involved in the financing of investment properties. Whichever way you go, keep a few things in mind:

• Do not enter into any deal without being thoroughly prepared with all the understanding, knowledge and proper forms necessary to enable your investment transactions to end with winners on all sides.

• Keep in mind that each state has specific laws. Things you learn from a nationally known guru will not be specific to your state. Always minimize your legal risk by asking your attorney, "Is this legal?"

• Always be fair and honest.

George Riley is a regular contributor to ForeclosuresMass Monthly. He can be contacted at Exit Realty Center at 781-297-9494, at Genesis Funding Resources at 508-904-7086, by email at george@genesisfr.com or via his website online at: www.genesisfr.com.

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February 2006

Seller Financing »

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