As a real estate investor you are probably aware that one of your goals is to acquire properties with as little cash out of your pocket as possible. In fact, this is exactly what is touted by every real estate guru. They tell you that you should be able to finance your investments with no money down.
Using other people’s money to finance investment loans is how real estate empires have been built for years. It’s truly all about leverage. It’s the old “borrow your way to riches” scheme. I’m sure you get the idea.
But, for lenders, the less money you have invested in a property, the riskier the loan. This is clearly a double-edged sword. The smart investor realizes that 100% financing does not mean “no money down”. This is especially true since the mortgage meltdown of 2007.
Nowadays you have to be even more creative since the max loan to value ratio (LTV) on most conventional loans is 90%. But there are ways to limit the amount of cash you have to bring to closing, such as asking for the seller to carry back a 2nd mortgage or asking the seller for concessions of 2-3% to cover the closing costs.
There are many conventional loan programs that will allow you to do this. Just make sure you know the rule about your specific loan program before you write the offer to ensure you are maximizing the seller contributions on your deal. And remember, this is a percent of the purchase price, not the loan amount.
But be careful because you don’t want to get so much that the lender starts to question the value of the property. If seller concessions go beyond program limits, a lender might think that the house is over priced.
Imagine making an offer on a duplex that is listed for $180,000. The property has been on the market for some time and you think that the seller will happily offer some “concessions” or “seller contributions” just to get the deal done.
You know that your broker will charge 1% origination ($1800) on this deal if you offer full asking price. Figure your maximum offer and ask the seller to also kick in $1800 in closing costs. The seller doesn’t actually give you $1800, it just gets deducted from his proceeds at the closing.
And, if you need to do some rehab on the property, the most popular way of limiting the cash you put into the loan is to partner with your contractor. You can ask him to do the work in exchange for a percentage of the profits when you sell or ask him to defer his fee until you sell the property.