How to avoid over finance? It’s a common mistake in a property investment strategy and with the introduction of 90% to 100% loan to value mortgages on investment properties, many property investors are taking opportunity to refinance their properties at a higher percentage of value than ever before…
Many real estate investors are taking cash out at the closing for personal use and are thinking of this borrowed money as a profit. Do yourself a big favour and avoid the temptation (and the strong come-ons by some lenders) to do this…
Avoiding over finance…here’s why? If you over finance your property, you might not be able to sell it for what you owe on it. We get calls from landlords in this position literally everyday.
Last week we talked to a guy which paid over $780,000 (full value and his first mistake) for a home last summer. He borrowed $676,000 to buy the property (close to full value and his second mistake).
Now his tenants are driving him crazy and destroying the investment property and he wants to sell. He really can’t sell to another property investor because no educated investor will pay him what he owes for this property.
He can’t sell to home buyers because the property is too damaged. His choices are to keep it until appreciation and mortgage pay-down bring value of property and debt into line or spend another $15,000 restoring the property so he can sell to a home owner for retail value.
If you over finance your property your cashflow suffers and your property suffers. We got a call yesterday from another long time property investor which got a second mortgage a few years back to take some cash out for personal reasons.
Unfortunately, the total of the two payments plus taxes, insurance and other expenses are more than total rent tenants pay. He’s taking about $250 a month out of his pocket to own the property and hasn’t been able to keep up with repairs.
Now the city has placed work orders on the house and he doesn’t have the money to complete them and he doesn’t have any equity to borrow against.
Two of the 3 units are vacant because of the condition of property and he’s trying to unload it because he can’t afford to make his mortgage payments. In all likelihood, he’ll lose the property.
In the short and long term, you’ll pay an arm and a leg for the additional money you borrow. If you’re offered a 100% cash-out refinance of an investment property, ask the lender what costs are associated with the loan.
You’ll find many mortgages like this carry costs of 5-10% of loan amount in points and fees. Get out a financial calculator and check out the difference in total interest payments between a $700,000 property financed at 80% of its value over 20 years.
Do the same calculation for the property financed at 100% of its value. At 100% financing you’ll pay additional interest payments and this is money which comes straight off your bottom line. Please don’t think you should never pull cash out of an investment property.
There are some great reasons to do exactly that when you want to buy more investment property. Keeping your total debt to less than 80% of value of property is the safest and most profitable way to manage your cash flow and portfolio.
How to avoid over finance? Spotting the mistake before it happens like borrowing more money than you can afford may make you feel richer in the short term, however it’s a financial recipe for disaster.