When it comes to real estate investing, it’s generally a good idea to have some of your own money. The power to negotiate with someone when you are purchasing a property is much greater when they know you actually have the money to buy the property.
If you have money, you don’t have to spend all of your time finding creative financing. Instead, you just make the offer and negotiate on value. I call this value investing in real estate. Basically, you negotiate and try to get the best deal you can for the property.
Now, in order to get the best deal you can for the property, you actually have to buy some property. This is my secret sauce. Ready?
The Secret Sauce of Negotiating as a Real Estate Investor
Remember that you make money when you buy.
In real estate, you make money when you buy – not when you sell. Not understanding this is one of the biggest mistakes a real estate investor can make. You always want to buy a property at a lower cost than what it’s worth. That’s a no-brainer.
The safest way to grow your investment the best is to buy your property with cash from a loan. This is why it’s so important to understand real estate finance and to understand how to keep the money you have moving.
Keep this in mind: you should also develop relationships with a mortgage banker and a broker.
Remember the rule of 80 cents on the dollar.
If you make money when you buy, then important to understand how to come up with a down payment. You always want to buy real estate at 80 cents on the dollar. In some cases, you can purchase property at 60 or 70 cents on the dollar. But the safest place to be is no more than 80. To clarify, that’s 80% of the real value of the property (even after repairs).
When you buy at 80%, you have 20% equity going into that property. This means that you’re in pretty good shape if sometime in the future you want to re-finance. Or even if you just want to hold the property and pay it down.
Remember the power of a downpayment.
I usually recommend buying a property with 10% down. In some cases, you can buy with 5%. I know investors who do it all the time. Finally, if you have a really strong credit score, there is 100% financing that is available.
In the 100% case, bankers typically will do what’s called a 70-30 loan, or a 70-25. That means for the first mortgage they’ll loan you 75% of the purchase price of the property, and then you’ll get a second mortgage at typically a much higher interest rate that is for 25%. You literally have 100% of the loan.
But be aware that you will still have to have some money for closing costs.
Remember that you can negotiate with power.
You are in a much stronger position as a negotiator if you are able to bring some money to the table.
Most lenders will want to see that you have six months of cash reserves of the mortgage payment, principal interest, taxes and insurance. They like to see that money in the bank. So if your mortgage payment is $1,000 a month, they like to see $6,000 liquid in the bank plus whatever the cost of the downpayment. For example, on a $100k house you would need $10,000 for your downpayment plus $6,000 in reserve.
If you have these cash reserves, your ability to negotiate will raise significantly. Be patient with the process. You’ll get here – I’m sure of it.
Maybe this all seems overwhelming. Or maybe you have a strong desire to invest in real estate but don’t have the funds to make it happen right now. First, remember that it’s best to get started sooner rather than later. And second, remember that it’s wise to find a mentor who can guide your investments for awhile.
One way to guarantee success is to come to my Real Estate Mastery Workshop in October. You can find out all of the information by clicking that link. I’d love to meet you!
Finally, let me know your questions about downpayment and loans in the comments below!
Billy, Would you recommend working through a realitor or directly work with the sellers Realitor?
Would you suggest starting out with setting up an LLC first to work under or doing it personally?
Hi Larry, thank you for your comment. I would advise you to always set up an LLC. Also, make sure to find a realtor that specializes in investment proprieties. Blessings, Billy
I recently opened my first brockage account. What would you recommend as good ETF’s to invest in as a beginner. Greatly appreciate your guidance. Thank you much
Hi Kim! This a great question! The term ETF stands for exchange traded fund, and the way to get started is to invest in indexed ETFs. There are many of them but my favorite for the stock market is SPY, which is an indexed fund for the S&P 500. I also like IVV, which is also an indexed fund for the S&P 500. Some funds I like for bonds are BND and TLT. It’s always good to research these but I would start by putting 90% in an index S&P 500 fund (either SPY or IVV) and put about 10% in a bond fund (either BND or TLT). I might do some more writing on ETFs because I think it’s a great subject to help people with, so thank you for your question!
The bank we are working with says we have to have 25% down on an investment property or pay mortgage insurance. Is that true?
Hi Elaine, thank you for your comment! Well it depends on what your personal income is, and also depends if you own any other investment proprieties. But if you are going to do a regular mortgage, anything less than 20% down might require mortgage insurance. If you want to become an investor, find a bank that will loan you the money directly and do a portfolio loan (in house loan). I will be happy to answer any other questions you have. Blessings, Billy
If I can get a 100% loan to value and I have to pay 5 points on a 70k loan is that a good deal? flipping the home in 90 days I hope..
Hi Wilbur, thank you for your comment! Based on my experience, 2 – 3 points would’ve been normal, however with 100% loan the investor/lender is taking a much higher risk. So 5 points might be appropriate. It’s not about the points, it’s about how much it cost and if you are in a financial position to absorb those costs. You should definitely consider how much the interested rate would be. Blessings, Billy