The Lucrative But “Not So Sexy” Side of Real Estate Investing

We can thank HGTV for putting glamour back into the real estate market. On most of the shows, you will see them boast about just how easy it is to make it in real estate by flipping houses for big bucks. It is obvious to most people how they never seem to quote the true “sold” price of the home or how long it took to sell it, but the potential profit is sexy! Seeing a house go from disgusting, smelly and virtually falling apart, to a beautifully rehabbed diamond just waiting to be someone’s forever home is sexy! Selling a house from one investor to another and making a profit without so much as sweeping the floor is sexy! All of that is attractive but the real sexy is in the bank.

Being the bank may not make your friends and associates get goose bumps when they drive by the house you are financing, however, when you measure the risk, time spent working on the project and all that it takes to complete the deal, you will find that being the bank is by far the be best position in any deal.

Most people have money in retirement accounts and unless you are earning at least 8% interest on your money, then you need to consider being the bank. Investors need to borrow money from private lenders because banks don’t lend enough money to investors who are rehabbing houses. Private lenders loan not only the purchase money but will also lend funds to rehab the house. Investors are willing pay premium interest rates because they get the funds they need to complete the rehab. The terms are six to nine months long, so paying the higher rates is short lived and make sense to the investor. Investors calculate the higher fees into the deal and still are able to make a profit.

For the lenders, there is an opportunity to make 8-15% or more on their money. If the loan is not repaid or the house has not sold within the term, it serves as the collateral for the loan. A savvy lender will lend no more than 70% of the after repaired value so if the lender does have to take the house back it can be sold quickly at a discount and get their money paid back. Performing due diligence on the value of the house, the items being repaired and the borrower’s ability to pay the loan back is imperative to make a wise decision on the who, where and how much to lend.

Remember, there are risks in every investment you make. After measuring the time and risk involved, being the bank may be the smartest, dull investment you make. The sexy part shows up on your statement every month.