Ok, a real estate investor was saying to me “I don’t like equity in any of my properties”. Also he made a comment that keeping no equity in his properties keeps the lawyers away. Right then my BS alarm went off. LOL. Unfortunately the situation didn’t allow for me to clarify what he said/meant further. But I took it as he’s 100% leveraged on all of his properties, which tells me he has no idea what he’s doing OR he’s discovered some strategy that I haven’t heard of. Obviously using leverage to build wealth is smart, but 100% leverage on all your properties is just plain dumb. What do you guys think re: that guys previous comment to me?
The school of thought is that 100% leverage means there is zero equity in the property and thus no incentive for a creditor to pursue a judgment. This might be a useful strategy if your properties are held within a properly structured entity and there is zero equity across the board. I would counter that this strategy kills your cash flow as you’ve indicated and any lawyer smelling blood will go after any asset and if they win the judgment will simply sell the asset and net whatever equity might be leftover. my 2 cents
I don’t like being 100% leveraged because:
(1) Fluctuations in the market can quickly make you ‘upside-down’ on the assets
(2) Being 100% leveraged makes a quick sale without bringing $$$ to the table nearly impossible if the need to sell quickly arises
(3) It is getting harder and harder to get 100% leveraged on investment properties
My two cents…
Keith
sounds incredibly difficult as well as ignorant to be 100% leveraged on an investment property - especially all of them!
He probably means loans between related companies. The 2nd or 3rd position liens are demand notes held by a friendly company that will call the loan when a creditor places a lien on the property. The controlled foreclosure wipes out the creditor lien.
I see and hear the arguments you guys are making against 100% leverage/financing (I’m going to use these terms as if they’re the same). Some of the negative remarks are:
I would counter that this strategy kills your cash flow...Not if you make good deals. If you know going into your deals that you are 100% financed don't buy until you find the right numbers, pretty simple.
sounds incredibly difficult as well as ignorant to be 100% leveraged on an investment property...It's actually pretty easy to obtain 100% leverage and it's also ignorant to make a comment about a strategy that you clearly don't understand.
"I don't like equity in any of my properties".I'm not so sure about your friend making this claim. Maybe he refinances and pulls cash out every so often therefore keeping his LTV high, I have REI investors who subscribe to this strategy. Also, you should remember this. EVERY deal is 100% financed one way or another. If the bank gives you 80% and you put down 20% it's still 100% financed. That 20% you put down has an opportunity cost. If it's not working for you and sitting wrapped up in some property it's costing you. I always ask the seller to hold 20% for this specific reason. Let him keep his money wrapped up in the property and I'll pay him 7-8% for that and I'll take my money and put it elsewhere or buy myself something nice. Good luck :beer
His strategy follows something Lou Brown teaches. There are different ways to get no equity deals and make them profitable, but they are far and inbetween:
Landlord deals:
The house might be free and clear or you may get the seller to finance a second and open on terms but not price. You may get zero interest or extremely low financing which may make it good for long term investment since you are paying mainly principal and not interest. The note created by the seller may leave you with very little equity to show for, but the interest rate makes it very appealing.
You Negotiate a second note reduction and payoff. You buy the house and get the release of lien from the lien holder but not record it till it is time to sell the property. The public records will continue to show the original second note as a pending lien and you have in your hand the release for when you need to sell.
And of course there are investors who still believe in investing in future appreciation still floating around out there and this guy might be one of them
You Negotiate a second note reduction and payoff. You buy the house and get the release of lien from the lien holder but not record it till it is time to sell the property. The public records will continue to show the original second note as a pending lien and you have in your hand the release for when you need to sell.
Very nice little bit of advice. Sly, but effective!
Actually I’ve been a mortgage broker for quite a while, so I would understand the financing side of it, and I’ve yet to see someone show me a lender who will go to 100% of the appraised value of an investment property easily. If you can do it, I gaurantee it won’t be an easy loan to come by.
And you can show me all the sides of this strategy and it is still my opinion that it’s a ridiculous strategy.
Have a good one… :rolleyes
motivatedceo,
Don’t overthink this. Your friend has not discovered some “SECRET” to success. There are almost NO properties tanywhere hat will allow a loan at 100% of value and still have positive cash flow. True, no one will want to sue him - why would they - he’s got nothing - NO EQUITY - NEGATIVE CASH FLOW - NOTHING BUT A TERRIBLE INVESTMENT!!!
Good Luck,
Mike
I concur Mike, so I took his advice with a grain of salt. He comes across to some people as a sophsticated investor, but unless I see one’s personal financial statement I can never know that for sure. There are too many income statement affluent people who think they know it all, and only later in life will they realize the balance sheet affluent people are the truly sophisticated. Remember MC Hammer? And Robert Allen? The two have nothing in common, except they made lots & lots of money and both later went bankrupt because they didn’t know how to save, invest, build equity, etc (note: R.Allen admits that in his Multiple Streams of Income audiobook, which was released post-bankruptcy).
I can imagine that guy who told me that info will wind up the same way as ol’ MC Hammer. LOL!