Understanding Financing Is The Key To RE Investment Success

[blws]

Many investors fail to understand how to structure a deal financially. Keep in mind that any lender needs to minimize their risk in the deal. Whether it is a traditional loan or hard money, the lender has to have a reasonable expectation that the loan will be repaid--on time and in full.

All lenders make loans based upon the risk they are willing to expose themselves to. Credit, income (yours and/or the property itself) and the physical value of the property are the primary factors in residential lending.

When you are talking about commercial properties, it is mainly the current/potential cash flow that determines the value of the property.

Another mistake most of us make is that we look for deals first and then try to find financing. We find what we THINK is a good deal, then later get turned down by a lender because the deal really doesn't make sense financially. We've done so much work up front, without really knowing what properties will actually have the best chance of being financed AND being truly profitable.

That's a good path to frustration and relatively few deals getting done. If you are finding that most of your deals aren't working, that may be the case.

Try talking to your lender first. Understand your lender's requirements and then go out and find the deals that fit.

Always make sure that the numbers work and that you account for all contingencies when you are running your numbers.

You'll have much better success if you know upfront what deals your lender will finance and under what conditions.

www.RealEstateFinance.biz

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[InvE]

Ok, i'm trying to get the big picture here. Are you saying, that I should go into my bank and ask them how much money they have available for high risk and how much money for medium risk or low risk?
Do banks work on things such as 401k invenstments etc...? I mean... do all these things have enfluence on what my bank will provide to me for my specific goals?
If so.. how do I find the best bank to deal with, or how do I screen banks for my particular investments? I mean come on, without my investments these banks would not be in buisness. Right or wrong? I mean, banks are out to make money off of the people who don't know, so would seller financing be the best way for the actual homeowner to capitalize on his investments?

[InvE]

Forgive me for attacking any banks. Here's my train of thinking. It may be legthy, but it will explain how I see it.
Banks are looking for a way to make money:
They wanna make money at as little risk as possible:
a) they make a $100,000 loan with a $200,000 piece of property as collateral. VERY LOW RISK.
a $100,000 loan with a $100,000 piece of property as collateral. What is their risk? High Risk? Medium risk? Low Risk?
c)They make a $100,000 loan with 80% financing, Is this low risk? Do they calculate APPRECIATION/year including the interest they are charging? If so it seems the bank business is where it's at. And if you are a home owner, it seems that Seller finance is WHERE IT"S AT!

[InvE]

You want it! I got it! Here's what it's gonna cost ya!
(This is my understanding as a nebie) (I'm probably wrong!)


$80,000 loan on a $100,000 peice of property with 6% interest.
If I dont make the first month payment, Bank still makes 20% on deal at current market rate. What's the risk in this?
As years go by, 6% appreciation on the property, per year increase, but i have a 6% interest, which neutralizes this. Bank makes all appreciation on property as time goes on, if you pay interest on $100,000 for the entire term of your loan. If you only pay interest on remaining pricipal you are creating a decending note or a shorter term.
I go 15 years paying on the property and for some reason i can't re-finance and lose my property. Why do people forclose? Can these people be helped? How much was actually paid toward the principal of that payment?
What's the payment difference on a 30 year loan as opposed to a 20 year loan? How much money would I save? How much more would it cost me?
Forgive me, I've got so many questions running through my head. I realize that, "What info is found at the Tax Asessors office" is the least of my worries." Thanks for listening to me.
any guidance would be appreciated. Thanks InvE

[Makeabuck]

a) they make a $100,000 loan with a $200,000 piece of property as collateral. VERY LOW RISK.
a $100,000 loan with a $100,000 piece of property as collateral. What is their risk? High Risk? Medium risk? Low Risk?
c)They make a $100,000 loan with 80% financing, Is this low risk?

NO This is acceptable risk. Anything over and you will pay PMI to safeguard the banks position.


Do they calculate APPRECIATION/year including the interest they are charging?

NO thety do not they lend on the appraised value .

If so it seems the bank business is where it's at.

The bank business is defenitely where its at. So if you got a couple of mil to spare start your own.

[InvE]

hehe, I hear ya. :praise: Thanks, i'm just throwing around ideas to maybe find out more. I know some of what i said makes no sense. I'm just a bit lost about some of this financing stuff and how it actually works.

[Makeabuck]

To get a real grasp of how financing works learn about the Time Value of Money.

Learn how different interest rates affect the value of a loan or indeed a piece of property.

Example:

if you want to buy a house and you can afford to pay $2K month in mortgage payment.

How much can you afford to pay for ther house if interest is 5%

now try 6% then try 7% do this all the way to 9% and see what happens.

Then write down all your answers and see the consequence of buying on an ARM instead of fixed.

This little exercise will thach you the basics of financing then read all u can about TVM

[InvE]

uhhhh :SM032:

[Makeabuck]

Try it as a much simpler exercise.


Standard 30Y loan

The exercise was to show the affect of interest on price.


If you can afford to pay 2000 Month for the money

how much can you afford if interest rate is:

5% 372563.
6% 333583
7% 300615
8% 272566 Here notice with just a 3% change in interest rate
the max loan is 100K +- less
9% 248563

In some parts of the country these numbers are big so if you like just divide
payment and Max loan by 2

[Chap]

Think out side the box here. You are an investor not a typical run of the mill person. why would you use a bank? Think creative. Find hard money lenders, owner financing , l/0 , etc. I guess what im saying is S---- the banks you dont need them to make money they need you. In a few years the banks are going to be sorry about the loans they are doing today.Arms, intrest only, prime plus etc. Its pure speculation as far as im concerned on there part.

[Makeabuck]

[QUOTE=Chap]Think out side the box here.

Wlile we investors know about creative options when we sell we sell to the

less well informed. They must go through this stuff to buy what we sell.

If we have a good understanding of what is involved and can hand hold our customers through we will close deals Faster and loose less .

[InvE]

Thanks Chap, i see what you mean.

I deleted the my post above because I discoverd my calculations were for the interest terms were wrong.

Thanks Makeabuck, I've gained valuable insite in your eplanations.

In some parts of the country, language will vary, but the numbers never do. :SM120: