Knowing your financial objectives and investing accordingly

Many of the real estate investors I talk to these days are buying for the long term hold. In fact, most don’t have a set time-frame in mind, they just know they want to hold properties as long term investments.  But “a long term investment” for one investor might be very different than for another.  I think many investors these days consider anything over 7 years as a long term hold (especially when you compare this to the type of appreciation and quick-flip investing that was popular during the early 2000’s).

However, I think there are plenty of other investors who are truly interested in owning property long after the mortgage has been paid off.  For these investors, the goal of the investment is less geared towards short term cash flow and more about owning an asset that will produce cash flows farther down the road, especially once the mortgage has been paid off. While I would not necessarily say there is one strategy better than the other, I would say that an investor should be mindful of the true objective of their investment when deciding what kind of financing to obtain.  I would venture to guess that most investors these days are buying with the intention of selling in 5- 10 years with the possibility of capturing some upside from a recovery in housing prices. For these investors, obtaining a mortgage with a longer amortization (ex. 30 years) and the lowest possible monthly payment would be a great way to capture immediate cash flow. While the principle would not be significantly paid down during this 5-10 year hold, the cash flow that was generated and potential equity (from recovering prices) could help them achieve their investing objectives.

For the other group of investors who are truly interested in a “long term investment,” the type of financing they might consider should look different.  If my goal was to own a house outright as quickly as possible so I could generate real income from the property for years to come, I would sacrifice current cashflow in favor of principle paydown (another way to achieve equity buildup).  To do this,  I would take a hard look at the amortization length and weigh my comfort level  as it relates to monthly cashflow (or perhaps even negative cashflow if I’m highly motivated to pay off the mortgage quickly). A quick example:

A $100,000 investment at a rate of 5% interest on a 30 year fixed loan would have a principle and interest payment of $536/mo. This may generate nice cashflow for me, but when I start paying on this loan, only $120/mo is actually going towards principle. Even after 10 years of paying on this mortgage, I’m still only paying $199/mo towards principle.
However this same investment, with the same interest rate on a 15 year loan would look quite different. While my monthly payment is higher at $790/mo … I begin to see equity buildup at a much faster rate. My principle paydown is $373/mo initially but jumps all the way to $616/mo by year 10.
Also interesting to note is the fact that after 10 years, I will have paid $46,100 worth of interest on the 30 year note as opposed to $37,000 in interest on the 15 year note – a difference of over $9,000 worth of interest in just 10 years.

Again, let me stress that I am not advocating one strategy over another. I simply believe in the importance of fleshing out your investment strategy before deciding what kind of financing to put in place. Too many investors obtain mortgages that simply don’t line up with their true investing objectives – especially when it comes to long term investing.  If you are an investor who plans on owning property for a very long time, let me encourage you to crunch the numbers on a shorter amortization schedule and consider sacrificing short term cashflow for future income.

5 Things Private Lenders Want to Know Before Investing With You

If you’ve been investing in real estate for a while, chances are you have considered using private money lenders (investors) to grow your business. Most people fail when reaching out to potential investors because they don’t answer the five critical questions that every private lender must have answered before investing with you (even if they don’t ask them). If you can answer these five questions, you will dramatically increase your fundraising ability. By putting yourself in the shoes of the potential investors and knowing what they are asking when you approach them, you will help to position your offering in a way that greatly increases your odds of acquiring private money to grow your business.

5 Questions You Better Be Able to Answer Before Private Money Lenders will Invest in You and Your Real Estate Deals

Am I going to get my money back?

This is the number one question that private lenders want to know when approached. If they do not feel like they can trust you enough to know that they will get their money back, they will never invest with you. Essentially they are asking themselves if they trust you to do what you say you are going to do. Investors invest with people they know, like, and trust. Potential investors have all heard the horror stories; at this point they are judging your ability to deliver, and they will not likely give you money until they deem that you’re trustworthy.

What’s in it for me?

If you have established trust, the next thing potential investors want to know is how they will benefit. Many people approach potential lenders with the wrong mindset, and tell them all about what the lender’s money will do to help their business. However, investors are concerned about what is in it for them, and you must address that up front.

What are my risks?

Every investment has risks and private lenders want to know, if things go badly what is their downside? Will they lose all the money they invested, or just part of it? Is there a chance they could risk even more than they put into that investment? A realistic investor knows that there are things that could affect any real estate investment’s outcome.They want to know if you understand them and are prepared, and that you have done everything you can to limit their risks. They want to know that you are realistic with your projections, and that they aren’t going to get hung out to dry when you encounter difficulties.

How is my investment secured?

If you are investing in single-family homes, is the investment secured by a first position on the mortgage, title insurance, and hazard insurance? If it is an equity partnership, how is it secured? Is it protected by the cash flow it generates, by hazard insurance, etc.?

Do you have a plan and is it realistic?

Before potential investors will invest with you, they want to know if you have a plan, if you’ve done this before, and have you thought it through or are you flying by the seat of your pants with their money? You must have a plan and it must be written down. You might think this is a “no-brainer” and that everyone has a plan before they approach potential lenders. However, I’ve seen it over and over again: people approach potential investors and they have a vision, but lack a step by step plan for achieving their investment goals.They want to know if you’ve done this type of investment before or if they are going to be a part of a new experiment. This can be one of the biggest hurdles for new investors to overcome. But if you can show experience on your team (notice I didn’t say it had to be you alone) and have a written down, well thought out plan, you will greatly increase your odds of them investing with you.

If you do not answer these five essential questions when talking to a potential investor, they will not invest with you. However, knowing their concerns and answering them up front will greatly increase your odds of acquiring them as an investment partner, thus growing your business faster. The key to raising great amounts of private money lies in addressing potential investor questions before they are asked, having a realistic plan, doing what you say you will, and being amiable.