Real estate investors, you might know this guy. It’s the guy or girl from the local real estate investors’ club talking about their latest deal where they bought a house with $60,000 equity. They bought it and funded it 100%, taking all of their equity out as cash at closing. And you are jealous!?
Come on! You are a real estate investor who is knowledgeable about financing and real estate investing. Why are you jealous?
Most of the loan products available today that you can 100% fund as an investment have very, very ugly loans. For example, it could be a first mortgage with an adjustable rate for the first 80% — which in itself should raise a few red flags.
But the remaining 20% of the 100% funding is really, really ugly. I’ve seen loans with rates that were literally 6 points higher than the first mortgage. Is it worth paying 13-15% on top of that extra 20% to withdraw cash? Some would say if you put that into another investment and get a much higher return than the 13% to 15% you’re paying, then maybe. But many investors use this withdrawal technique to buy groceries and pay personal bills.
As if this wasn’t bad enough, the fees and lending 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’ll roll into your loan.” Great! Let’s pay $10,000 in fees and also pay 13-15% interest on it. All in all, not a smart move, but in some exceptionally rare cases.
Try to 100% finance a house with a very ugly compound interest rate on the cash flow. You end up giving the money back with exorbitant interest rates, huge upfront payments, and negative cash flow on the property if you keep it.
So beware of real estate investor babble bragging about these types of deals to your local group. You should know better and hopefully you do now.