Is it always in the buyer’s best interest to get the most amount of financing possible? It seems most people are trying to get the 100% and 105% financing deal. If this isn’t always the best…what are some scneario’s in which it isn’t?
if you’re talking about rentals, it would be bad to finance over what you need to make a positive cash flow. in other words, if you need to get a minimum of $200 per month PCF on a particular house, and over-financing would only leave you with $75 per month, you’ve got a problem.
cecsix,
Could you please explain what problems could be?
Thanks
$75 per month, on most properties, doesn’t build a big enough cushion in the event of a repair coming up that may cost a few thousand dollars like a furnace replacement, a major plumbing repair, electrical issues, or just a tenant that doesn’t pay or moves out and leaves massive destruction.
plus, if you finance over 80% of the value, chances are it will be tough to sell unless you are in a very steady appreciating market.
i hope that answers your question. i’m a beginner myself, but i’ve already learned a lot from my first few deals. no matter how hard you try, you are going to miss some expenses that will come up, and you need to be generating some decent cash flow to cover them.
JMHO.
“$75 per month, on most properties, doesn’t build a big enough cushion in the event of a repair coming up that may cost a few thousand dollars like a furnace replacement, a major plumbing repair, electrical issues, or just a tenant that doesn’t pay or moves out and leaves massive destruction.”
that’s true, but if you put more money down, it’s still comming out of your pocket. what’s the difference if i put more down and receive less monthly CF versus putting less down and receiving less monthly CF? it seems it would cost you either way.
“plus, if you finance over 80% of the value, chances are it will be tough to sell unless you are in a very steady appreciating market.”
why is this the case? how does the amount you finance affect how easy you can sell?
most investors i talk to think of 80-85% as the break even point. when you sell, you have closing costs, probably some repairs, and other expenses (advertising, etc.). so unless you have a fast appreciating market or you hold the property for several years, if you need to sell quickly you might be in a jam.
i’m not saying 100% financing is always bad, you just asked the question if you should ALWAYS try to get as much as you can. simply, the answer is no, not always. you have to take each deal and make the best for yourself.
in fact, i’ve financed my first two deals without any money out of pocket. but i am closing on a third soon, and i’m paying 10% down, because it made sense to do so.
and most importantly, just remember that this is all opinion. you might ask 10 different people this and get 10 different answers. if you are comfortable financing everything to the hilt, then that’s up to you.
“plus, if you finance over 80% of the value, chances are it will be tough to sell unless you are in a very steady appreciating market.”
why is this the case? how does the amount you finance affect how easy you can sell?
From my understanding, say you finance a property costing 100k at 100%. That means that more than likely you’ve also financed in all your closing costs, etc. which tacks on an additional 5k or so. This property has no equity.
When you go to sell you’d probably want a profit, but if you’re in a market that’s appreciating really slowly or not at all then you probably won’t make your money back.
With an 80% financed deal you have a cushion of about 20% automatic equity. In which case, if you do have to sell for a loss it won’t be as hefty as if you had 100% financing. I think the rule is that you always want to build profit into your deals.
If I’ve got this arse backwards please correct me 
no trixy, i think you have it absolutely arse forwards.
;D
Keep in mind that you will have a very difficult time finding a bank willing to lend 100% on an investment property. 10% is usually the minimum with only a few banks being the exception to that rule…
OK Guys, I think that you’re getting a little confused here. Yes, it is always preferable to get 100% financing on your deals. However, “getting 100% financing” means that you are financing the entire PURCHASE PRICE, which should be much less than the market value.
Here’s an example. Let’s say that you find a 2 bedroom/1ba house that is worth $50,000. The seller has owned the property for 15 years and has just lost his job. He is desperate to sell and sells it to you for $25,000. No repairs are needed. You go to the bank and borrow $25,000 to buy the house. You have gotten 100% financing and still have $25,000 (50%) equity.
I can’t afford to do a bunch of deals if I have to put my own money into each deal. Therefore, I ALWAYS buy at a big discount (no more than 70% market value) and ALWAYS borrow at least 100% of the PURCHASE PRICE.
Mike
whew! This makes more sense to me. I appreciate the replies!
yep, thanks mike. i thought he meant 100% LTV, but apparently he was talking 100% of purchase price.
Exactly…I too thought he was referring to the LTV. But if it’s the purchase price we’re talking about I agree with Mike