Best/Most affordable ways to finance and scale

[Graham Reinhard]

Hi guys -

Relatively new to BP. I was hoping to get a post started on most affordable and scalable ways to source financing. Not particularly focused on MF/SFR but rather wanted to collect an idea of easy and cheap ways to finance acquisitions. Please feel free to share your thoughts on how you started and how easy ways you found to scale the portfolio. Thanks, Graham

[Don Konipol]

@Graham Reinhard

Financing will cost the market rate for the risk involved. Factors include your experience, track record, type of property, location of property, down payment, credit score, debt to income ratio, cash flow of the proposed investment, and possibly other factors.

The most expensive acquisition money is short term hard money, rates 12-18% and upfront points. The least expensive mortgage money is financing for a personal residence, currently 4-4.5%.

Depending on the factors above you may or may not qualify for all, some, or none of the financings. The dream of most investors is to obtain a mortgage based solely on the collateral, no personal guarantee, at competitively low rates. Possible with lots of experience, and a track record of success.

Based on the phrasing of your statement, I’m going to assume that your interest in real property investment was piqued by listening to the various fantasy stories being pitched every day, via reality TV, guru internet sites, or how to books. These pitches are almost always wild exaggerations or examples of successful deals that are relatively rare and require knowledge, experience, capital, longevity and luck. The majority of successful real estate investing is a grind; utilizing one or more marketing methods to generate leads, sifting through garbage leads with misleading information to find the few acceptable deals, negotiating with sellers with unrealistic expectations of the worth of their property, educating the sellers as to the reality of the real property market, running analysis to estimate property value, reading 100 page appraisals, negotiating deals , the list goes on.

I find that people new to real estimate grossly overestimate the return on investment generated by properties, and grossly underestimate risk. They tend to believe they can gain control of a property with no capital contribution, and live off the cash flow the property throws off. Nothing is further from the truth. A property selling for $1,000,000 may have a net income of $80,000 per year. Financing $750,000 at 6% will result in payments of about $60000 per year. Your $250,000 investment will yield $20,000 cash flow, about $12000 equity build up, and any price appreciation. Depreciation allowance will shelter the income from taxes and move the taxes owed to the time of sale. This is a far cry from the instant riches most newbies anticipate. Much larger returns are available to those with the knowledge, experience and capacity to get “creative”.