When borrowing for investments are you always in debt?

Question

While starting out in real estate, in doing my initial research and listening to the podcasts and such I hear of the hard money lending and private money as well as loans from the bank. My question is while you borrow this money for investment properties how does the re-payment work? For example, a bank loan will take 15-30 years to pay off, is that the same with private investors? I am concerned about constantly being in debt to others while investing, how do others tackle this problem?

Mike Dymski · Answer

A rental property is just a tiny business.  It has revenue and expenses.  You can choose to maximize the return by leveraging the business with debt or you can purchase for cash and reduce the risk and the return investment (or any level of leverage in the middle).  I purchase at ~75% LTV and add value; so, my leverage goes way down within a short time period (and cash flow goes up).

Theresa Harris · Answer

How long you are in debt depends on the length of the loan.  Another way to look at it is your tenant is paying your mortgage for you.  The advantage of a longer term for a loan is the payments are smaller.  You have to factor in interest rates, but right now they are pretty low.  The lower monthly payments means there is more money left at the end of the month and you can put that towards other properties or investments.

You can always pay the mortgage off faster.

Kenneth Garrett · Answer

@Matthew Yeoman

Correct the hard/private funding is short term.  Its purpose is to fund the deal and rehab if possible depending on the lender.  You can put down 20% and borrow at the onset and not use hard/private lenders.  I typically buy distressed, therefore traditional lending is not possible.   Using other peoples money provides building positive relationship on multiple fronts.  Another funding source is always positive when you are trying to scale your business.

Bryan Richardson · Answer

@Matthew Yeoman

I believe you can have 10 mortgages in your personal name. We do commercial loans on our properties. No limit on the amount or number of those you have.

Jason D. · Answer

@Matthew Yeoman If you are looking to grow your portfolio, you'll always be in debt. You have to be comfortable with debt to be successful in real estate. If you arent comfortable with debt, you'll need a boatload of cash to invest.

Pat L. · Answer

I had no choice but to start with seller financing & rehabbing my way to a higher appraisal & hopefully a refi.

It was not unusual to have several properties maxed out as were my credit cards & I had to rent rooms in all to survive. I was able to secure a couple more back in the day with mortgages through the local banks as I did earn an excellent income.

Then one day it was all free & clear!!!

Bryan Devitt · Answer

If you're buying a property that needs work in order to bump the value, that is usually where HML come in. If you get a mortgage you have to hold onto it for a set time before you can refinance it and it is generally a much bigger PITA to get construction costs and get the checks cut as work goes on. It will just drag out the process, if you can even get the construction loan for it at all. So you go to a HML and show them the deal, they like it, they finance it and you get it done much quicker (for a price) but once it is done you can now go to a bank and get a normal loan to pay off the HML and hopefully get some or all of your money back from the rehab. It just streamlines the process and avoids the time you have to hold the initial mortgage before you can refinance.

Theresa Harris · Answer

@Syed H.  Isn't there a limit as to how much they will loan you based on your income and the income to debt ratio?  There is in Canada.

Syed H. · Answer

There is no limit to how much you can borrow. Just a limit of how much money you have to put down and how much debt can you service.

Matthew Yeoman · Answer

@Theresa Harris

Thanks Theresa,

Have you ever run into a problem with having too many mortgages, for instance is it common to have ten homes and be paying a mortgage through tenants on all of them?

When borrowing for investments are you always in debt?

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