BEST REAL ESTATE FINANCING MOVE

Your question is; is it better to go cash or is it better to finance if you're going to rent? That's a pretty simple question. You don't want to go hard on money, because hard money normally comes at a rate of around 12 percent. It can be as low as about 8, not much lower than that. Where obviously if you get a loan from a conventional lender you can drop down to two, three or four, five, six percent depending on where the market is at the time. So obviously between cash or hard money and institutional funding for lending from a bank, it's going to be better to go with the bank. There are certain requirements that you're going to miss out on if you do. Go with a bank and that is they're going to limit the amount of properties you can buy. Whether it's 4 or ten, not only are they going to limit the amount of properties you can buy, it's going to be suspect based on the current market conditions.

Let me explain what I mean by that right now. Because the market's climbing so rapidly, if there's what they call a buyer’s or a lender strike, now the buyers are striking they're not buying because the market is too high for them. And so the pace of the buyers has slowed to around 32 where it should be higher in the 60s. Buyer sentiment right now is way low okay so there are fewer buyers out there that are willing to buy.

Secondly, I have a friend of mine or a buddy that just recently went out to get a loan, and he was denied. The reason he was denied is, he went out for a Fannie Mae Freddie mac loan, he had a property that was an older home and they classified it as unique. They couldn't get a good enough comp on the property and the Fannie Mae Freddie mac loan they were going to put in place denied him in this case.

It was going to be used as a business like an Airbnb type product, could be used as a business zone in residential areas. They were thinking it was potential for Airbnb status and it was also classified as unique because it was an older home built in the early 1900s. So those three strikes put them out. If it was a strong healthy market those lenders would have financed him. Also, they're going to look at his job and how much cash he has going into the deal, and so right now lenders are pulling back. They're looking for only very qualified buyers because they know that there's going to be a market correction in the future. So you either have to have a really strong down or a great job that isn't going anywhere in the recession, and you are an extremely qualified buyer. And you're purchasing a home that's in a really super duper area that's a little over exaggerated. But at the end of the day the goal of the lender is to slow the pace of the market down, by restricting lending and putting the money on the sideline. They don't want to go into assets at the end of the day that they believe can end up in default.

So there are two things that are also happening in the market right now. The lenders are getting money to lend but they're choosing to sit on it. the other thing is, i saw an article just recently come out on Dr Horton. Where they've slowed their build and the reason they slowed their building process is because economically they can see some head woods in the near future, and so they're cutting back on the amount of houses that they're putting out to market. Based on seeing the inventories go too high, and with the foreclosures that are going to come in and start to compete as they start to release about 20 months of shadow inventory back out onto the markets across the nation. 20 months of shadow inventory is no small number by any stretch of the imagination.You're going to see a large amount of houses that end up going to foreclosure sale, and you're going to see a correction in the market that will be devastating as far as the loan. You were talking about a 70, 30.

It's common to get an 80 20 loan; a 70 30 loan could be possible they're just specifically wanting you to go in with more money down on the deal. 30 percent down puts them at less risk and frankly more risk. What I can say is this: when you look at the amount of money that you want to put down, your goal is to put as little as you can on the house right now. If you can get someone to give you a hundred percent financing, take it. If your goal is to go into debt, don't. I have equity share partners that I deal with, so for me that's a bad word. but if you're going to go into debt make sure you put all the risk on the bank, so you want 100 % financing. That way the risk is on them if you default down the road, because the market falls so far that you can't carry the asset any longer if you put 30 % percent down.

Now your cash 30 percent of it is at risk, and that's no way don't do it. Because the market's gonna fall and when it falls, if you can't cash flow or you can't make that payment you're gonna default and you're gonna lose 30 percent of your margin or your value. Because you put that cold hard cash into a deal, so right now you want as little money as possible into a deal. Let me just sidestep on that again. I had a client who wanted to buy a house for around 600 grand, and i said; don't do it you're in the high side of the market the market's gonna collapse. He said: “well my wife really wants his home, she loves it. And we have all these reasons why we think it's going to make all this money”, which is very common for people to believe.

Because they believe that in the market it's going to make a lot of sense. And they have this great plan that they're going to see it go through and make it right. And so you can't convince them, otherwise they're emotionally tied to this home. It's the one they've looked at all their life, those types of arguments or scenarios.

What I did is; I said, well if you're going to buy the asset or the home in the attic, there is a potential that the person would own or carry, that's really where you'd want to go with that. One, if your wife is dead set on buying that home at the height of the market, at a value that won't sustain, the market corrects down and it's going to put your family at risk. Because of its value and all of the reasons they have overcome, then to save their soul & their financials, that is just a token. But you know what i mean is, to go in and put that owner under a lease with an option to buy. In other words hand them very little cash down, and have them carry the majority of the deal. So if the market corrects back, her plan goes away and she can't do what she thought she was going to do.

The market's not there for it and if the dream fails or collapses, then you're in a position where you're handing the risk or the asset back to the original homeowner because you got them to carry with little dam.

It's the same thing with the bank in a market that's as critical or risky as this one. Unless you really have an iron-clad solid job that's not going to go anywhere, and you have a recession-proof business, that will withstand a deep market cycle. You better make sure that you get the other guy, i.e the bank or the person selling you the home to carry that note, and you want to come in with as little cash down as you possibly can.