Real estate investor bluster – other investors, beware

Real estate investor bluster – other investors, beware

Real estate investors, you might know this guy. This is the guy or gal at the local real estate investor’s club talking about their last deal where they bought a house with $60,000 in equity. They bought it and financed it 100%, taking out all their equity in the process as money at closing. Are you jealous too!?

Come on! You are a real estate investor who understands real estate financing and investing. why are you jealous

Most of the loan products available today that you can finance 100% as an investment property have very, very ugly loans. For example, it could be a first mortgage with a variable rate for the first 80% – which in itself should raise a few red flags.

But the other 20% of 100% funding is really, really ugly. I have seen loans with interest rates literally 6 points higher than the first mortgage. Is it worth paying 13 to 15% on top of that extra 20% to cash out? Some would say 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 use this withdrawal technique to buy food and pay personal bills.

If that’s not bad enough, the loan origination fees and costs associated with obtaining these loans are usually very, very high. In a recent transaction I saw, the fees were around $10,000.

“No problem,” says the loan broker, “we can switch your loan.” Awesome! Let’s pay $10,000 in fees and also pay 13 to 15% interest on them. Not a smart move in all but a few extremely rare cases.

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

So, beware of the blathering real estate investors bragging to your local group about these types of deals. You should know better, and hopefully you do now.

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