Creative financing gets a lot of attention from new investors, and rightfully so. It’s flipping awesome!
Who wouldn’t want to buy properties for next to nothing? Especially when you are just starting out and have very little disposable income. However, I’m here to play the devils advocate for the sake of newbies out there.
So far I have acquired three properties by way of 20% down conventional mortgages. And you guessed it, I found them all on the MLS.
Sexy huh? ::crickets:: I know… it’s pretty boring. But let me explain.
I’m not very smart. But I’m smart enough to know that I don’t know what I don’t know… y’know?
Real estate can be overwhelming for a new investor. It definitely was for me when I first got started. Despite having read a ton of books and having done the math on a ton of properties, I still made a ton of mistakes. This is where that whole 20% down conventional loan thing saved my buttocks.
3 Ways Using Conventional Loans Saved Me From Disaster
1. It helped me build my team organically.
All I had to do was find a real estate agent — and the rest of the pieces fell into place from there. Once we found a property, my real estate agent put me in contact with a great bank. The bank hired the inspector, the bank hired the appraiser, and the bank coordinated with the Title Company. Once the sale was finalized, the real estate agent recommended a property manager, and the property manager recommended a contractor. Everything was accomplished without me having to track down and interview a dozen team members.
2. It uncovered problems and saved me a lot of money
I fixed a house with my dad when I was growing up, so naturally I though I was an expert. After walking through the property once, I felt it was in great condition and would require about $2,000 in minor cosmetic repairs (HA!). Had I done this on my own, I probably would have foregone the inspection to save money and just bought the place “as-is.” Luckily, the bank was smarter than me and required an inspection to be accomplished. What did this delightful inspection reveal?
- Needed a new roof ($8,000)
- Dead tree in the back ($3,000 + huge liability)
- Lots of deferred maintenance ($5,000)
As Lloyd Christmas from Dumb & Dumber would say, “Samsonite…I was WAYY off.”
Had I been doing this on my own, I probably would have given up at this point. There’s no way I was going to foot the bill for a new roof this soon. Luckily for me, my real estate agent was able to get the seller to pay for the roof through his insurance during the Treatment, Repairs & Replacements (TRR) period of negotiation. This was huge, and I would never have thought to suggest it myself.
3. Finally, it provided me with a financial safety buffer.
Mistakes are going to happen when you first start investing in real estate. Maybe you forgot to factor in vacancy. Maybe your insurance was higher than expected. Maybe the rent you can get is $100 less than you thought.
Now, would you rather have those mistakes happen when you’ve leveraged 100% of the property and need to self-manage in order to break even? Or would you rather have those mistakes happen when you’ve put equity into the property already and have considerably lower monthly mortgage payments allowing for cash flow?
Long Story (Kinda) Short…
I won’t lie to you and say that it doesn’t sting to sign a check for 20% down on a property that you’ll never live in.
It definitely stings the nostrils.
However, over the last 10 months I have purchased three properties and have been able to see how the process works hands-on. Now (and only now) do I feel comfortable enough with the ins and outs of buying property to pursue a creative strategy.
Related: The Loan Application: A Complete Checklist of Documentation Investors Need for Approval
As we speak, I’m trying to work out a seller financing deal with someone who is liquidating his properties. I’m sure I’ll make mistakes, but at least I won’t make the same ones that I did on properties #1, #2 and #3.
Creative financing is amazing and should always be something to strive for. Buying a property with OPM (Other People’s Money) is the holy grail of real estate investing. However, if you are a new to real estate and have the capital available… don’t rule out a conventional mortgage.
It might just save YOUR butt, too.
- Newbies: Have you utilized conventional financing for your initial investment property purchases?
- Experienced investors: How would you suggest making the transition into creative financing?
Leave your comments below!