Real Estate Investors, maybe you know this type. It’s the guy or gal at the local real estate investor club that talks about their latest deal where they bought a house with $60,000 in equity. They bought it and put 100% financing on it, pulling out all their equity in the process as cash at closing. And you’re jealous!?
Come on! You’re a real estate investor that understands financing and real estate investing. Why are you jealous?
Most of the loan products out there today that you can do 100% financing on as an investment property have very, very ugly loans. For example, it might be a variable rate first mortgage for the first 80%–which by itself should raise a couple red flags.
But the remaining 20% of the 100% financing, is really, really ugly. I’ve seen loans with rates literally 6 points higher than the first mortgage. Is it worth it to pay 13 to 15% on that extra 20% to pull cash out? Some would say that if you invest that in another investment and get a much higher rate of return than the 13 to 15% you are paying, then maybe. But many investors are using this cash out technique to buy food and pay personal bills.
If this was not bad enough, the loan origination fees and costs associated with getting these loans are usually very, very high. In recent transaction I saw, the fees were about $10,000.
“No problem,” says the loan broker, “we can roll into your loan.” Great! Let’s pay $10,000 in fees and pay 13 to 15% interest on it as well. Not a smart move in all but a few exceptionally rare instances.
Try getting a house with 100% financing with a very ugly blended interest rate to cash flow. You end up giving the money back in exorbitant interest, huge up front fees and negative cash flow on the property if you keep it.
So, beware the real estate investor blabber that brags at your local group about this type of deals. You should know better and hopefully now you do.