Just Say No to Debt:
Use Cash
There are several ways to purchase real estate. If you have ever read any of Carlton Sheets material then you know there are at least 30+ ways to buy real estate. Some are very good and some are not so good, depending upon your circumstances. We teach a number of ways to get cash at MyInvestmentServices.com. The bottom line is that the more money you borrow to buy real estate the more you will be at risk. The absolute best way to buy real estate is to use cash, pure cash, and baby!
Oh, I can hear millions of you now shouting “never use your own money!” Yeah, I hear you; the problem with all the no-money-down gurus is that they never mention what happens when life happens. That would be too scary. The truth is that people die, people have babies, people get married, people get divorced, people get new jobs and people lose jobs. It happens. It’s not a matter of “if” but “when”. So you have to ask yourself what will happen to your highly leveraged empire if the economy turns sour. What if there is a real estate bust like what happened in 2008 – 2010? What happens if the pool of decent renters is raided by lenders who need to loan money so they relax their standards like they did beginning in the 1990’s with the Clinton administration and continued until 2007?
I’ll tell you what happens, all of your good renters become homeowners and you get left with unreliable tenants. That’s what happens and that more than anything else will cripple your real estate empire. If it doesn’t then it will certainly put you in a horrible position when the economy spins into a recession and your properties lose a lot of value. Then you’re stuck with all these bad tenants wrecking your properties and not paying you their rent. Then you can’t get another loan to keep things afloat because the banks won’t lend you money anymore. Get the picture?
I can show you mathematically how you can build a stronger, less risky, and more profitable real estate empire by using all cash and only cash. If you graph it out it will look like it takes a while to get going, because it does. However, when your mega cash cow starts to give milk, look out! You will be a juggernaut that can’t be stopped. You will absolutely make a lot of money. No one can stop you, and you will owe no one. Better yet, the next time there is a recession you will be the one everyone is running to buy their properties. You will be King of the world! Who’s Your Daddy Now? Go ahead; take your best shot you no-money-down gurus.
Sorry, I had to take a break and calm down. Now having said that, I know that because you can borrow money now at around 4% that a lot of you will do it. Go ahead, I did it too. I can promise you though that in the end you will regret it and you will see that it will take you longer to build your massive money producing monster. If you do borrow, promise me that you will put down at least 20%. I recommend 25% or more. This way you will get the best rates and terms. Remember, all you borrower’s out there, to keep your ratios in check. Never owe cumulatively more than 2/3 of what you own and never have debt payments more than 1/3 of your gross rents. If you manage to keep to these ratios the banks will always love you and unless you are a complete moron you should always be making money.
Before borrowing from commercial banks to buy real estate, if you have a 401K, you should check with your employer because you may be able to borrow against your 401k an amount up to 50% of its contents. It gets even better, because you aren’t borrowing from anyone else. You are borrowing from YOU Inc.! And guess what? The interest you pay on what you borrow is paid to YOU too! And guess what else? It isn’t taxed either. You know, maybe our government isn’t so bad after all. The reality though is that our government does suck, maybe not as bad as other governments but it still sucks. In fact I bet there is one good guy in our government who was an entrepreneur at one time and saw this amazing opportunity to do something really good for a lot of people. The cost of borrowing form a 401K is usually a small administration fee. No application fees, no appraisal fees, and no junk fees of any kind.
If you are just starting out and don’t have a lot of cash lying around like us seasoned veterans, take heart. You would be amazed at how easy it is to form a partnership with an individual who does have money lying around. Sometimes a veteran real estate investor will partner with one or more newbies to teach them the ropes, and more importantly have one or more “bird dogs” out there to do the hunting. When they find a suitable prey the investor puts up the money then he and his protégé split the profits. I have seen this work with doctors also. In fact, it could work with anyone who has more time and less money.
Another way to begin acquiring real estate when you are starting out and don’t have a lot of cash is to borrow from a private investor. They usually charge more in interest and fees than a bank but they are also more open-minded and creative. They usually understand the real estate investing game and aren’t interested in forming partnerships or teaching newbies. They will often finance up to 100%. They may also loan you money that you secure with other property you have. They are really not that hard to find either. Some mortgage bankers and brokers keep private investors in their back pockets to keep a deal moving forward rather than watch it die an agonizing death where nobody gets paid. Private investors can be tough, I have used them, but I don’t recommend it although I know some of you will just have to try because you want that sweet deal. I get it, I really do. I ended up being okay but it did cost me a lot of money in interest payments.
Still another way to acquire properties when you don’t have cash is to use hard money lenders. They call them hard money lenders for a reason. It is a hard way to do business. They charge exorbitant interest rates and exorbitant fees to get the money. They usually have a very quick term, sometimes referred to as a balloon payment. In other words, you have three to six months to use their money paying interest only, then at the end of the three or six-month term you have to pay back all of the principle you borrowed. If you can’t pay it back they will take your property, and they will, trust me. Sometimes people use this method to buy a rental property that needs work. They will borrow enough money from the hard money lender to buy the property and rehab it so they can rent it out, then go to a commercial bank to get a traditional mortgage on the property and pay back the hard money lender, and have excess cash from the traditional loan to line their pockets.
For years when money was easy I would pay cash for a property and for the remodeling then borrow from a bank in the form of a traditional first mortgage with easy terms and a low interest rate. This way I would continue to build my rental property empire while at the same time increase the amount of capital I had to work with. Keep in mind that it all has to be paid back and if you are a borrower you have to keep your ratios in check or you will get off and stop growing or borrow from private investors, or worse yet, hard money lenders.
In the end Cash is King. If you use any other method to acquire real estate then you are putting yourself at risk, sometimes grave risk. Life happens and when it does remember the old saying: “The man with the Gold makes the rules”. If you don’t owe the banks and other people you get to make the rules. If you owe the banks and other people they make the rules and they aren’t as nice to you as you are. Don’t be a sucker and fall for all that debt crap. Be a man and pay cash.
Visit MyInvestmentServices.com for information, tools and guidance when investing in Real Estate. Written by Gary Wilson, April 25, 2014.
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