When getting started in real estate investing, knowing the difference between good vs. bad debt is crucial. More tips for real estate beginners.
Q: I enjoy Ilyce’s radio show very much. Thank you for what you do.
I’m a new investor in my late 20s seeking to build a portfolio of rental properties for the purpose of both positive cash flow and general wealth creation. With the help of your book, 100 Questions Every First-Time Home Buyer Should Ask, I recently purchased my first investment property and now I’m hooked!
I hear a lot of different opinions about leveraging debt verses building equity in real estate. My basic understanding is to maximize debt when it’s an income producing asset and minimize debt when it’s not. Is this correct or are there other factors I should consider?
Also, I want to build my portfolio in a quick, but responsible way. Would you recommend that I reach a specific equity threshold in a rental property before to pursuing the next deal? Is there more information you provide that I can tap into?
A: When looking at debt versus equity, we’ve always chosen to get the biggest mortgage possible on our investment properties, so that we can write off the expense of interest against the income the property generates. So, we purchased an investment condo with an interest-only loan and put 20 percent down plus paid another chunk for upgrades (we bought it off of the blueprints nearly a decade ago). We had an adjustable rate mortgage on that property and have managed to stay cash positive for most of our ownership.
Today, it’s tough to purchase investment property with less than 25 to 35 percent in cash. But, it can happen depending on the deal and what you’re buying. A friend recently purchased three commercial office buildings that were in a distant suburb from downtown Atlanta. But they happened to be close to where he lives and he was looking to move his office space closer to home. He and his partner bought the properties which were 30 percent leased, hired a new leasing agent who found new tenants, and moved their offices into the buildings. The property is now nearly 60 percent leased and is profitable.
When you’re just starting to invest in real estate, it’s difficult to get lenders to cut you special deals. Once you own four residential properties (including one that you live in), you may find it difficult to get financing through a Freddie Mac or Fannie Mae loan. Building a portfolio of rental properties (or other types of investment properties) means making connections with several commercial lenders who can guide you on what kind of equity they’ll require in order to provide financing.
Some lenders will require that you put down 35 percent in cash for deals 2, 3 and 4, but by the time you own a half dozen properties, particularly if they each have a significant number of units, you may be able to refinance all of the properties together with a single loan.
Keep in mind that the amount of debt you carry on your investment properties must be repaid. You need to consider the rental income you have for your properties, how stable they are, your federal income tax situation, and other details relating to the number of properties you wish to buy in the future in making your decision about how much debt to carry on your properties. Given this information, you can also sit down with a lender and he or she can walk you through the different scenarios that could affect your decision on how many properties to own and how much debt to carry.
The best piece of advice we can give you is to not try to do this all on your own. Build a group of trusted advisors who can help you create the real estate investment portfolio. If you take the right steps, and continue to make this a central goal of your life, you’ll undoubtedly get where you want to go.
We’re glad you found Ilyce’s book be helpful. She recently completed an 18-part webinar+ebook series called: “The Intentional Investor: How to be wildly successful in real estate” which you can find at ThinkGlinkStore.com.
I am writing this to ask for your help regarding American Equity Foundation. I went forward with them largely from your endorsement. You have always appeared to be concerned with the average person and giving them sound financial advice.
We met with American Equity Foundation in Las Vegas, NV to see about their program to short sale our house and then rent it back from the buyer in March 2012.
We researched the company and did not find any negative reports about them, in fact we saw your ringing endorsement of them on CBS Money Watch.
After meeting with them we filled out their necessary paperwork and submitted the $300 membership fee. We were told that to ensure that we were economically viable to the investors we would need to make a $2000.00, completely refundable deposit that would count as our first and last months rent.
We made the deposit in May 2012 via Pay Pal. We were contacted by their Real Estate Agent Tim Kelly from Remax concerning going forward with the short sale. He informed us that since we were current on our mortgage we were not giving any incentive to the Bank to agree to a short sale. He advised that we stop making our mortgage payments. We informed him that we did not feel that this was option for us, because of our religious beliefs. He said that he understood but that there was nothing he could do to help us. I then contacted the CEO of American Equity Foundation Christopher Nelson via e-mail about getting a refund of our deposit in early July 2012. He stated to me that it would take approximately two weeks to get us our refund. After almost a month without a refund I sent him numerous other e-mails regarding our refund of deposit. He consistently told me that we have not been forgotten and he would advise the accounting department to issue me my refund. This has not happened and it has been two months since I have made the request. Now he is no longer answering my emails.
Please help me get our $2000.00 deposit back.
Thank you for your time,