18 Jan Understanding Real Estate Finance
A lot of investors get hung up on the lack of knowledge when it comes to real estate loans and how they work. Many people have talked about creative financing techniques. The truth of the matter is, there are some financial liability issues whenever you do a true nothing-down deal. Either way, when you get started in real estate investing, you will have to have a basic understanding of finance. In today’s blog post, I’m going to give you the tools you need to understand how to make finance work for you in real estate investing.
I’ve said it before and I’ll say it again, this is the golden age of the investor. This is the time that you should be buying real estate. The liquidity and availability of funds are still out there. I see it continuing to be that way for a long time.
What You Need to Know About Real Estate Finance
An investor needs to at least have a basic understanding about how the lending markets work. The first market I want to talk about is the retail lending market. This is when mortgage bankers, mortgage brokers, and banks intersect with the retail buyer or retail investor as well as any home buyer that is looking to get a loan. The lenders underwrite the loan according to certain criteria. Then, they take all of the loans they have originated and sell them to what’s called the secondary lending market. In order to be sold, loans must meet certain underwriting guidelines.
The secondary lending market is where the quasi-government mortgage banks and a large number of private-sector mortgage banks purchase pools of loans that come from the retail lending market. They put them together and then repackage them in larger pools to sell to investors in the equities lending market.
Mortgage Banker vs Mortgage Broker
The second thing about finance every real estate investor needs to know is the difference between a mortgage banker and a mortgage broker. A mortgage banker usually sells his own products. The pros to this are that they typically can close faster and sometimes give the customer a low-interest rate or a lower cost. The cons are that the loan products they offer can be limited, which means sometimes they cannot get a loan done.
Mortgage brokers typically work in what we call a “broker shop”. The normal broker shop has less than 10 loan officers working for it, but a broker is exactly that – they broker loans. In most cases, they represent many lenders. An experienced mortgage broker can meet or beat the offer of a mortgage banker. They can also get the loan funded because they have so many lenders available.
Raising a Down Payment
The most important thing for you to know about real estate is that you make money when you buy, not when you sell. Your goal is to buy a property at the best possible price. When you sell it, you can make a higher profit margin, plus any equity you may have built up.
It is much more efficient if you have some of your own money to put up for a down payment. The power to negotiate with someone when you’re purchasing a property is much greater when they know you have the money to buy it. You don’t have to spend all of your time trying to come up with creative financing. You just go in, make the offer, and try to get the best price you can for the property.
What finance tips do you wish you knew before you began investing in real estate? Comment below so our aspiring investors can learn from our more advanced investors as well! If you’re looking for more information on how to invest in real estate, I encourage you to check out my teachings!