Top 10 Investor Financing Mistakes
As a mortgage broker that works exclusively with real estate investors, I have encountered just about every crazy and botched financing scenario that you can imagine. Over the course of the years, I have kept a list of the crazy things that investors do (it's quite long) and today I'll share the top 10 with you. Don't make these mistakes!
1. Quitting the Day Job Too Soon
Repeat after me: “Equity does not pay the bills.” I see it happen all the time. An investor gets a few rentals and decides to quit the day job to pursue investing full time. Big mistake. Don't quit the job until you have 12 months of living expenses saved up and/or monthly cash flow equal to what you were making at your day job.
2. Being Broke and Greedy
My mentor used to say, “You can't be broke AND greedy." In RE investor world it means that if you have no money to put into a deal you better be prepared to pay high rates or give up some equity to a partner.
3. Underestimating Holding Costs
If you're a flipper, in most areas today, your properties are taking a lot longer to move. Factor in ALL of your holding costs to the budget - loan payments, utilities, etc - so you don't lose all your profit.
4. Not Properly Setting Up Your Entity
If you list your occupation as real estate investor on a mortgage loan application, you are in for a tough road ahead with the underwriter. You may as well say you are a drug dealer. Same goes for naming your LLC. Try not to reference anything having to do with flipping or foreclosure help or anything like that. Stick to an easy name to deal with like Acme, LLC.
5. Paying Cash for a Property
Paying cash for a property is fine as long as you don't need the money back anytime soon. If you do, then you're trying to get an unseasoned cash out refinance and if you're lucky enough to find a lender to do the loan, you will pay through the nose for it.
6. Buying a Rental That Won't Cash Flow
WHY would you do that? Remember, equity does not pay the bills. This is the main reason why investors go broke.
7. Deeding the Property to an LLC Before It Is In Permanent Financing
Let's say you buy a property with private money and take title in your LLC. When you go to refinance it, the lender will either require you to deed it out of your LLC before closing or they will deny the loan outright. Risk mitigators are telling lenders that the loans that have the highest rate of default are usually in names of LLC's so many lenders won't touch them if they've EVER been titled in your LLC. Just take title in your name, get your financing set and THEN put it into your LLC for asset protection.
8. Using Hard Money That Doesn't Include Repairs
This is just dumb. Just use a 100% conventional loan at half the rate and ¼ the fees and have the seller pay closing costs since you're funding the repairs out of pocket anyway. Same goes for companies that will cross-collateralize equity in another property to fund repairs. Just get a HELOC yourself and pay ½ the interest rate.
9. Listing for Sale While In Short Term Financing
I have guys come to me all the time to try to refinance their short term hard money loan because the property they are flipping has not sold. Good luck. Why? Well, you have a vacant, unseasoned, rental property that has been listed on the MLS within the last 6 months. Even if we can get a lender to do the refinance you will have a prepay penalty that will make you cry.
10. Not Having Adequate Cash Reserves
You should not own a property and have no money in the bank or available credit on a line of credit. Something will come up and then you will be forced to make a bad decision. This is a business and every business needs cash reserves.
Some very good points here. Some are obvious, but I found numbers 4 and 5 caused me some thought. I guess "Lansing Holdings LLC" wasn't such a good idea. Unfortunately I think "Acme" has already been taken...
I understand what you are saying about not buying for cash in #5, but that conflicts with #6, don't buy rentals that don't cash flow. Since lenders won't make a loan for under $50k, taxes are high, and rehab costs inevitable to get a rental permit, you either have to buy under $50k and pay cash, or pay over $50k and not have it cash flow. Kind of a catch 22 here!
Anyway, thank you lassitermarketing for your tips.
ypochris
There are many lenders that lend under $50K although loan amounts that low do become problematic. I'm all in favor of paying cash for a rental - just know that if you need the cash out of it within 6 mos of purchase it will be a problem.
I'm glad you found the article useful!
Susan