Pros and
Cons of Using Your Own Money When Buying Foreclosures
By Dave Lindahl
Financing plays a vital role in real estate investing -- and this includes
buying foreclosed homes. While it's practically a mantra to "use other
people's money," keep in mind different investments will usually require a
different strategy. A financing option that worked wonders in one real
estate deal can easily fall flat in another. Following is a quick look at
some of the pros and cons of using your own money to buy a foreclosure
property.
Pros of Using Your Own Money
One of the best reasons to use your own money to buy a foreclosed home
is rate and terms -- there aren't any. Since you are using your own money,
you don't have to pay any points, origination fees, and a host of other
garbage fees (often adding up to three to five percent). When buying a
foreclosure it's important to closely watch the transaction costs. After
all, what's the point of buying a foreclosure at a great price only to
have your profits eaten away by excessive loan fees?
Another good reason to use your own money to purchase a foreclosed
property is your ability to act quickly and without needing the nod of
your lender -- or real estate partner. If you have your own money, you
have complete control and have the ability to make deals that other
investors who rely on conventional financing can't do.
If you have less than stellar credit, using your own money is probably
the best option. With today's tight lending requirements, it may be
difficult to get a conventional loan. And unless you're already rich,
getting a hard money loan can really get expensive. Can you say 16, 18, 20
percent?
Cons of Using Your Own Money
Probably the number one reason you shouldn't use your own money to
invest in a foreclosure is that it may limit your ability to act on
another investment opportunity. It's what savvy investors call leverage.
In a
real estate market that is appreciating, the less money you put into
the deal to acquire the property, the more profitable it is. For example,
let's say you have $100k in the bank for investing, and you buy a
foreclosure valued at $130k for that $100k. You've used up your investment
money. What if the following week you could have bought a foreclosure
valued at $150k for $90k. You're out of luck.
Another reason using your own money may be a bad idea is if it would
leave you short on funds. For example, you suddenly need a new furnace in
the middle of winter but don't have the $5k to do it. Or your renter
leaves the state and now you have a vacant home on your hands. Or the city
passes a new ordinance that requires you to pay a huge tax assessment for
new street and sewer. You never know?
In conclusion, there is no one-size-fits-all solution. Obviously, an
investor who wants to quickly rehab a foreclosure and flip it has
different financing needs than an investor who want to buy it and rent it
out long term. And, of course, there's tax consequences - so be sure to
consult with your tax advisor. It's essential to do your research, analyze
your options and choose the financing solution that solves your problems
-- and makes your investment profitable.
To learn more about investing in real estate. - David Lindahl, also
known as the "Apartment King" has been successfully investing in
single-family homes and apartments for the last 14 years and currently
owns over 7,400 units around the US. David regularly shares his secrets
and experience on the same stage as Tony Robbins, Robert Kiyosaki, and
Donald Trump! To get your free report on HOW TO AVOID THE 23 MOST COSTLY
MISTAKES THAT REAL ESTATE INVESTORS MAKE AND HOW TO AVOID THEM Click on
http://www.ReMentor.com/report_23mistakes.shtml.
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