Real Estate Investor Blabbers – Beware Other Investors

Real estate investors, maybe you know this guy. It’s the guy or girl from the local real estate investor’s club talking about their latest deal where they bought a house with $60,000 in equity. They bought it and put 100% financing on it, taking all of 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 loan products out there today that you can finance 100% like 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, it’s 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 that if you put that into 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 food and pay personal bills.

If that wasn’t bad enough, the loan origination fees and costs associated with taking out 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 too. 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 the cash flow. You end up paying the money back with exorbitant interest, huge up-front 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 kinds of deals. You should know better and I hope you do now.