Real estate is a real investment.
Companies go out of business all the time. No one for sure can say that an established company will be in business 50 years from now. Real estate will be there. Investing in the right finances for your real estate deals is one of the most important things you’ll do. Creating the right amount of debt, getting the best rates and determining cash flow on your deal is incredibly important. A house isn’t considered an investment in this discussion. A house doesn’t produce cash flow and is another way for the bank to hold your money hostage. On a house, you’ll have a down payment, mortgage insurance and interest rate based on your credit score and other factors. You have to prove that you can afford the debt because the bank doesn’t consider it an income producing investment. The opposite occurs when you invest to buy an income producing property. In any real estate deal, your most important partner isn’t your agent or the person you are working with on the deal. Your biggest partner on the deal is the bank.
Four ways to approach real estate
- Buy it yourself. Self-fund your purchase.
- REIT. A real estate investment trust. Not recommended but it will pay you more than the bank. You get dividends but you don’t own the property.
- Syndicator. You invest money within an investor fund.
- Rea Capital. You have the opportunity to buy a real asset, are an owner of it and you receive a monthly dividend.
Loan Examples:
- Residential. Usually four units or less, and you must occupy one. This loan is fairly easy to get, usually easier to get than home loan. This loan is based on credit, income and the rental income is added to your income.
- Commercial. Loans for four units and above. The bigger the deal gets, the more the lender will look at income of the property and less to your income. Banks will look at your net worth first, then credit, and your track record (your ability to manage the property).
When investing in commercial real estate, you should look for a multi-family investment with a minimum of 16 units. That’s because it produces enough income to protect the investment. Many times a bank will offer an interest-only loan at a certain percentage above Treasury rates when financing these types of deals. You’ll need to compare rates to find the best one and length of term for your situation. Financing is extremely important. You need to know financing because it costs you money. A difference of a quarter of a percentage point in interest rates on a large deal can mean paying hundreds of thousands of dollars more a year. Another difference you’ll want to pay attention to is your down payment. Unlike buying a house, you won’t want to pay your principle down after the initial down payment. The deal becomes about how much money you can make from it. As the land value continues to appreciate and rents continue to increase cash keeps flowing. This flow covers the debt payment and gives you passive income. There is no value in paying more to bring the debt down. Because financing is so important in these types of deals, you should spend more time negotiating financing than the price. As a small investor, the deck is stacked against you to keep you there.
Money Myths
Don’t fall for these money myths:
- Buy a house. In reality, this ties up your money.
- Invest in a retirement plan. You’re giving your money to someone else and have no control over it.
- Buy Stocks. Gambling with your money.
- Savings Account. A bank gives you no return on your money by having it sit in your account.
- Small real estate investments. These types of investments aren’t big enough to create real money that can become indestructible.
Break out and invest. Do the Deal:
- Find the right deal
- Negotiate the right price and win the deal
- Finance the deal
Take the time to study and learn. Know real estate financing, and get it right.
