Real Estate Investor Blabbers – Beware Other Investors

Real estate investors, you might know this guy. It’s the guy or gal from the local real estate investor club talking about their last deal where they bought a house with $60,000 in equity. They bought it and put 100% financing on it, taking all the equity out of it in the process as cash at closing. And you’re jealous!?

Let’s go! You are a real estate investor who understands real estate financing and investing. Why are you jealous?

Most of the loan products out there today that you can finance 100% as an investment property have very, very ugly loans. For example, it could be an adjustable rate first mortgage for the first 80%, which alone should raise a couple of red flags.

But the remaining 20% ​​of the 100% financing is very, very ugly. I have seen loans with rates literally 6 points higher than the first mortgage. Is it worth paying 13-15% of that extra 20% to withdraw cash? Some would say if you invest that in another investment and get a much higher rate of return than the 13 to 15% you’re paying, then maybe. But many investors are using this cash-out technique to buy groceries and pay personal bills.

If this wasn’t bad enough, the loan origination fees and costs associated with obtaining these loans are often very, very high. In a recent transaction I saw, the fees were around $10,000.

“No problem,” says the loan broker, “we can incorporate your loan.” Excellent! Let’s pay $10,000 in fees and pay 13 to 15% interest as well. It’s not a smart move at all, except in some exceptionally rare cases.

Try to get a house with 100% financing with a very ugly interest rate combined with cash flow. You end up paying the money back with exorbitant interest, huge upfront fees, and negative cash flow on the property if you keep it.

So beware of the quackery of real estate investors bragging in your local group about these types of deals. You should know better and I hope you do now.