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Real Estate Investing Financing Truths
First Published: September 2005
Last Update: September 2005
Author: Steve Majors
Traditional Methods of Real Estate Investing
Through years and years of transactions, the traditional method of buying and selling Real Estate investments has evolved into a
market of its own and has grown into a Real Estate machine that circulates massive amounts of money through Real Estate
Agents, Real Estate appraisals, Title & Escrow Companies, Banks, and Mortgage Companies.
These once-simple real estate investments have grown from a modest fee for a professional to keep the Buyers or Sellers
best interest in mind during negotiations, to now, traditionally, 6% (or more) of the total sales price being paid
to Real Estate Agents (via Brokers who often take the majority of the money), another 3
-5% being paid to Title, Mortgage and Escrow Companies for various fees, and then even more is taken
for a real estate appraisal.
As if that weren't enough, then a huge amount of money is absorbed by the Bank, through the form of interest payments
usually over 15 - 30 years and totaling 2 - 3 times the original purchase price of the initial Real Estate investment!
Down Payments go to pay a variety of fees.
Now, don't get me wrong, it certainly is possible to make money through these methods, but the
traditional real estate investment system is designed to simply break even for the
home owner in purchasing a home (the first, and perhaps, only real estate investment they will ever make) in this manner. It
is really not designed for the investor, who, of course, wants every real estate investment to make money.
Traditional funding only allows the Home Owner to break even.
Example - Home Owner Financing: (the numbers represented here reflect the methods, not necessarily the price structures of any
given real estate investment market.)
List price on property (with Real Estate Agent) $200,000
Bank loan available (owner-occupied, 100% @ 7% interest) $200,000
Monthly payments (over 30 years) ~ $1350
Taxes, Insurance, etc. (per month) ~ $250
(This example is for an average home in an average neighborhood, for the average American using an
average interest rate of 7%. Of course, these figures do not apply everywhere.)
Therefore, the payment for this property is approximately $1600 per month for 30 years, to be paid by the home owner living in
the property.
Now, the traditional real estate investment system allows for this home owner to have a change in their lives and decide
to purchase another (usually larger) home. They have the right, and often do, rent out the first house and move into the new
one with their family.
The owner will be responsible for any additional expenses (repairs, Home Owner's Association fees, etc.) as well as their
desire to make a small cash flow from this endeavor.
Their previous home now becomes a true real estate investment where they increase their
'homeonwer's monthly payment to the renter by an additional $200 per month, for a total price to
the renter of $1800 per month.
Reasonable enough until/unless there are repairs to be made C or, the renter leaves and the new
landlord has to make payments on this vacant house. Then, this $200 positive cash
flow per month real estate investment doesn't look so good.
But, the rent has been established for that house and the comparable rent for the area
can easily be calculated using this method;
STANDARD RENT CALCULATION - (Simple Method)
Total payment for the property (includes Principle, Interest, Taxes and Insurance
known as PITI at 100% loan at 7% interest) + cash flow for the investor (usually $200 per month) = Rent
Note: With several homes in the area of similar size and style, plus the fact that most homeowners in the area have similar loan
structuring, we can estimate that whatever the average loan percentage is will create a
standard rental rate for X model real estate investment in this case, $1800.
A simple (and LAZY) way to remember it is;
PITI + $200 = STANDARD RENT
If an investor (one that seriously wants to make money from buying/selling Real Estate investments) wishes to purchase the
same house in the same area and for the same amount of money, the traditional real estate investment system
doesn't allow the investor to really make any money from the transaction.
Example - Investor Financing:
List price on property (with Real Estate Agent) $200,000
Bank loan available (investor loan, 80% @ 8.4%) $160,000
Monthly payments (over 30 years) ~ $1250
Taxes, Insurance, etc. (per month) ~ $250
(This example is for an average home in an average neighborhood, for the average American with an
average investor interest rate of 8.4% ¨C of course, these figures do not apply everywhere, but the formula is very similar.)
Therefore, the monthly payment for this investor- owned real estate investment is approximately $1500.
At first glance, seems very good, as the investor will have a cash flow of $300 per month
- more cash flow per month than the homeowner-turned- investor.
However, the difference is that the 'Investor (the one serious about making a profit from this real estate investment) has
brought in cash (out of pocket) of $40,000 ¨C UP FRONT!
Plus, the investor has to pay a higher interest rate (in this example, I have included 1.4%, while a bank may charge several
percent for investor loans - those identified as being purchased solely for the purpose of being a real estate
investment - check with your lending institution on their policies prior to finalizing your loans)!
Now, I don't know about you, but I don't know too many people with that kind of money for 1 property
- not to mention the fact that this person expects to make several real estate
investments, repeating what works several times.
Not only does the investor have to come up with $40,000 up front (every time they decide to make a real estate investment), but
how long will it take (at $300 per month) to make enough to purchase a second investment property at this rate?
10 YEARS!! (presuming there are never any repairs, the investor never takes out a penny of the cash flow for their own use, etc)!
Investors and Homeowners get different rates.
Not what I call a wealth path, not what I teach and certainly not any way to run a business.
END Part 1 of 2.
About the Author:
Steve Majors has fixed stereos, been a radio DJ and owned several successful businesses - even before his wild success in
Real Estate investments. Extremely well traveled (36 countries & counting), he now teaches others the secrets of Real Estate
investing with his very own LAZY methods (minimum effort = maximum results). Profit from articles, news and information
from one of the most creative investors on the planet! http://SteveMajors.com
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