02-26-2006, 11:03 AM
| | 3 Good Reasons Not to Over-finance Your Properties
With the advent of 90%-100% LAV. loans on investment properties, many investors are taking the opportunity to finance (or ref.) their properties at a higher percentage of value than normal. Many are taking cash out at the closing, and many are choosing to pay close to retail for properties that qualify for this financing, on the theory that a no money down deal is a good deal, even if it only cash flows a little.
Smart investors avoid the temptation (and the strong come-ons by mortgage brokers) to do this. Hereís why:
1. You canít ďdumpĒ properties in an emergency. I get calls from landlords in this position literally every day. Like from a guy who paid $78K (full value) for a rental last summer and got a purchase money loan for $76K. Now his tenants are driving him crazy and destroying the place, and he wants to sell NOW. He canít sell to an investor, because heís over-leveraged, and canít sell to a homeowner, because his tenants have destroyed the house. Or from the lady who bought a $100,000 duplex for $59,000...but then got a 2nd mortgage for another $50,000. She took cash out, spent it, and now canít afford to sell the pain-in-the-rear property
2. You canít get consistent cash flow. I got a call yesterday from the owner of a 3 family who got a 2nd mortgage a few years ago to take some cash out. Now the cityís on his back and he wants to sell...but the 2 payments total more than the property would gross fully rented. Unless HE pays off the 2nd of $20K, he wonít be able to sell.
3. Youíll pay an arm and a leg in the long term. Check out the difference in total interest payments between a property financed at 80% of itís value vs. 100%, and youíll see what I mean.
Thereís nothing wrong with having no money in a propertyóas long as your total debt is less than 80% of the retail value. Borrowing more may make you feel richer in the short term, but itís a recipe for disaster.
Reprinted from the Real Deal, a monthly newsletter for Real Life Real Estate Investors with permission of Vena Jones-Cox. Get a free 3-month trial subscription by logging onto regoddess.com.
Last edited by elva : 02-26-2006 at 11:05 AM.