Understanding Financing Is The Key To REI Success

Many investors fail to understand how to structure a deal financially. Keep in mind that any lender needs to minimize their risk in the deal. Whether it is a traditional loan or hard money, the lender has to have a reasonable expectation that the loan will be repaid–on time and in full.

All lenders make loans based upon the risk they are willing to expose themselves to. Credit, income (yours and/or the property itself) and the physical value of the property are the primary factors in residential lending. When you are talking about commercial properties, it is mainly the cash flow that determines the value of the property.

Another mistake most of us make is that we look for deals first and then try to find financing. We find what we THINK is a good deal, then later get turned down by a lender because the deal really doesn’t make sense financially. We’ve done so much work up front, without really knowing what will actually have the best chance of being financed AND being truly profitable.

That’s a good path to frustration and relatively few deals getting done. If you are finding that most of your deals aren’t working, that may be the case.

Try talking to your lender first. Understand your lender’s requirements and then go out and find the deals that fit.

Always make sure that the numbers work and that you account for all contingencies when you are running your numbers.

You’ll have much better success if you know upfront what deals your lender will finance and under what conditions.