To get conventional financing as an investor, many deals require a large down payment. Hard money lenders even require substantial down payments. Financing is a difficult challenge for many investors.
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
So how do we do real estate deals?
Real estate is an ‘Other People’s Money’ business, plain and simple. You do not need your own money to do deals. Let’s look at this example deal.
250 Cash Flow
15K Down Payment
65% LTV after down payment
To do this deal, the lender requires 15K down as they will only go to 65% LTV. A down payment investor will lend in 2nd position, but only up to 65%. So your lending falls through. What is the problem here?
Is it the lender? I think not. The problem here is that the deal is not good enough to get 100% financing. This deal cannot be done unless you have money. But if you do have money, you are doing a deal that is 80% LTV. What if holding, rehab costs and/or selling costs increase? What if the market goes down and/or you cannot sell for enough to break even? You lose.
If a deal is not good enough to do it without any of your own money, then it is not a good enough deal.
Savvy investors should walk away from the deal above. That deal should be purchased for 65K using none of your own money not 80K using your own money. Many in high priced areas should look at a different strategy and/or different market.
Finding the Best Deals Should Be Your Priority!
What needs to happen is investors need to master finding the best deals. If you cannot do a deal using 100% of other people’s money then you have not mastered finding great deals. Therefore, if you can’t make it without money, you can’t make it with money.
Photo: Alex E. Proimos