I’m 18 and have gotten interested in real estate over the past few months. Its been my understanding that as an investor, you use other peoples money (opm) to make money in this business according to Tyler G Hicks. Would the banks laught at me if i went in there and asked for a loan?. I dont have bad credit, but its not “great”. I’m working off a car loan to help build up credit.
I do have about 250k in mutual funds, but i’d rather not touch that money. I live in Birmingham AL, and there are 6 units for sale at 139,000. What i dont understand is, all this talk about loans. If I borrowed the 139,000, for 14,400 in total rent fees a month, it’d take 9.6 months before i came close to breaking even (that seems like a long time). in the mean time you have other expenses such as mantaince, and tenents who dont pay their rent, oh and dont forget the interest on the loan…it seems easier and cheaper to use my own money, but all these books make useing opm sound so great, can someone better explain this to me, i’m lost. :-\
The idea behind using OPM is that you can leverage your investment. Lets look at a couple of scenarios where you have $100,000 to invest in real estate. In the first scenario, you buy one house for the whole $100,000. You can rent the house for $1,000 per month. After allowing 25 percent for maintenence, taxes and insurance, you get to keep $750 per month. In the second scenario, you use the $100,000 to buy 5 houses by paying 20 percent down and borrowing the rest of the money. In this scenario, you would rent the 5 houses for $5,000 per month and after allowing 25 percent for maintenence, taxes and insurance, you would get to keep $3750. But then you have to pay the mortgage on the money that you have borrowed. If you get a 6 percent rate on the money that you have borrowed and pay it back over a 30 year period, you would have to pay about $2400 per month, leaving you a net income of $1350. On top of that, you would get to depreciate $500,000 worth of houses instead of $100,000 (about $1000 per month instead of $200). When you get ready to sell them, appreciation will be a greater dollar amount (five times the property, 5 times the appreciation) Also, if you have 1 house vacant, in scenario #1 you have no income, whereas in scenario #2 you still make $350. The down side would be where you have more than 1 vacancy. You would have more money going out than is coming in. but it only takes 2 months of full vacancy to pay for 1 months payments. Some of these numbers are over simplified to make a point, but I think that this does show you how it is easier to profit from using other peoples money.
You are a young guy. I would suggest you invest in uprising markets in the U.S. and then when at the top of the market (sellers market stage-2) you turn around and do a 1031 Tax Deferred Exchange. Think about it for a minute, what is the appreciation on a million dollar apartment house in an uprising market?
Try 10-30%. I have seen property values literally double over a 3 year period in a good uprising market…
Call your county Clerk and recorder and ask them what the intrest rate is on Tax liens! I know some county’s are paying up to 17% apr that is guarnteed money on your money then take 20k or so and go drive the country check out other real estate markets and decide where you want to invest talk to other investors that have been around the block!!! I hate to say it so blunt but there are better markets then Alabama!!! I started when I was 20 and am now 29 with enough money coming in every month that I really do not have to work!! Think outside the box being new to this is a great thing you have not picked up on some of the bad habits!!! LOOK BEFORE YOU LEAP!!!
Banks get paid for lending money. If they don’t lend the money, they don’t make any money. They want to put the money on the street. They, however, don’t want to lose the money. That said, they are going to look for flags that warn them that they may not get paid back. You need to take those flags away. The bank will ask for more money down to take the flags away. You will end up with 20% or 30% down. Different instiutions have different flags. Banks have different flags than Reits. One way to miminize the difficulty in financing is not to go to a bank, but find a mortgage broker in your area that finds loans on the types of deals that you are looking to do. Not the home loan group, but the investor group broker. Now when you take him your deal, he will not laugh at you, he will ask about the flags in your deal, that warn him that the deal might not be successful. If you have doubts about your deal, remove them and then present it to the broker. Remember, the broker that says no to every deal never makes any money. He is eating cat food and driving a Yugo.
So very true!!! Like the person said, Look outside your local area. I’ve found Branson Missouri to be one of the best areas in America to own raw land! Of course, not all locations and types of land are the best. Some are better than others. For example: There’s one development that has a golf course that is rated the number two public golf course in Missouri. This course is scheduled to go private in about 6 weeks. When that happens, the only people who will be allowed to play this course will be home owners or land owners. This will cause a big increase in the asking price of the homesite lots (raw land) said to be a price increase of about ten thousand dollars! Those investors who already own a lot would be able to sell it for ten thosand more after that date than they could sell it for today! But they would’nt want to sell it that quick. Why? Because the developer
is also putting in a 30 acre lake AFTER the golf course goes public. This will cause another increase of about ten thousand dollars. Let’s say you use the 10% down financing, and make payments, and you get in before the golf course goes private.
You just mad a very nice return on your small investment, using other people’s money! If you have any questions, or would like to see if there are any more lots available, let me know. Happy Investing!