Three Types of Real Estate Investors: Which Are You?

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For those real estate investors who could not borrow from banks and are still looking to leverage their real estate investments, seller financing is a possible consideration. Quick review: in a seller financing transaction, the seller plays the role of the bank instead. The seller will finance your purchase of his or her home. Most negotiations will fall into four major factors:

  • selling price,
  • interest rate,
  • the length of the financing,
  • and the amount of the down payment.

As you negotiate in these types of deals, the factors get played around throughout. The seller may consider lowering the selling price, for instance, in exchange for a higher down payment. Or in another example, the seller may consider raising the interest rate if you are looking for a much longer term of financing. Each variables can often be changed depending on your needs and the sellers’ needs. As a result, one should carefully think about which factors are more important than others.

There are different types of buyers as well. You have to consider which buyer you are. Here are a few examples we can look it and see how these four factors play out.

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1.) Speculator

A speculator is looking to capture appreciation in a housing market. Given the events in the last several years, in certain markets there are opportunities to speculate and capture appreciation. A speculator is looking to fully maximizing his or her profit in a short time frame.

So as a speculator, one would pay great attention to the selling price and the down payment amount. Monthly cash flow will play a second fiddle to this venture. The speculator will love to put a low down payment and yet still get a competitive sales price. He or she is willing to pay a higher interest rate or a short term balloon payment to achieve those goals. The speculator may suffer because he or she is not going to get good monthly cash flow, but he or she knows that holding this piece of real estate is a short term play and even a 3 to 5 year negative cash flow scenario may not create a big enough dent to his or her future profit sale.

Related: BP Podcast 013 – Buying Real Estate with Seller Financing and Speculating with Leon Yang

2.) Long Term Real Estate Investor

The LTRE investors will love to hold the real estate forever. In fact, there are great benefits to holding real estate forever. The rental income is good. The tax benefits are good. And maybe sometime in the future, the value of the home may rise (but for someone who wants to hold the real estate forever, doesn’t that just mean you’d have to pay more property taxes?).

For LTRE investors, one would probably like to have a lower interest rate and a longer term financing. Suppose the interest rate is not too much more expensive than the current market, the investor would probably like to lock down the financing terms and hold it for the duration of the loan (whether it be 15 or 30 years). The investor may even want to pay it off earlier because he or she may not like debt so much. Nevertheless, the investor understands that rent will eventually rise and the investor should be able to earn a big spread on the monthly cash flow. He or she wants the income. And with good patience, he or she will get it.

The selling price may not affect this investor as much. The investor is probably willing to trade a higher selling price for a lower interest rate that leads to a lower monthly payment.

3.) “Will Get Financing Soon” Investor

Perhaps you are an investor who currently hasn’t been able to get financing yet but will be soon. Maybe it is because of a short sale history or maybe you are rebuilding credit. In any case, you want to take advantage of this depressed market  before the opportunity goes away. The time to buy cheap homes is now.

For this type of investor, the ideal situation is to lock down a good selling price. You know prices that low won’t last that long. So you want to do whatever you can to get it at the price. So what to give up? Interest rates, down payments, or length of financing. You can give up all that knowing that shortly you will be able to get bank financing soon. So what if for 2 years you have to pay 10% interest? You won’t be paying that forever. You know you can replace it with a cheap loan very soon. Besides, by that time you can get financing the real estate market might have already recovered.

For this type of investor, it is get in, and figure it out later. It is a bit riskier. But watching your real estate market go up 50% while you are standing on the sideline is a tough pill to take.

Conclusion

These are just a few examples. The important thing is to see what kind of investor you are and what kind of factors are important to you. Fight for those factors in your negotiations. We all love to get everything as cheap as possible, but when push comes to shove, you need to understand what to fight for and what to give up.

Photo: Tambako the Jaguar

About Author

Leon Yang

Leon Yang is an active real estate investor in Las Vegas. He is a buy and hold guy who also likes to flip from time to time. His main passion is to traveling to the less traveled places and inspiring others to become financially independent through real estate.

10 Comments

  1. I am long term investor, buy and hold for ever.\If, you have triple net investment, tenant pays taxes for ever, besides insurance and maintenance. Unfortunately, cant pay off this investment, heavy penalty, but can get 25 yrs fix rate.

    • Terry Hershberger on

      Real Estate Investor, buy and hold forever, pass on to family – Cash Flow Forever (From tenant), Federal Tax Benefits, Using Leverage of other People’s Money to Increase Control, Principal Paydown (by Tenant), and of course appreciation of property.

      Love your Tenant – They get up every day and go to work for you, collect their paycheck for each week, and at the end of the Month, give you 25-35% of it for rent so you as an investor can pay all the expenses and Enjoy the Cash Flow!

    • Kris, are you saying that your only finance option had a prohibative prepayment penalty? That removes a lot of flexability especially with a long term lease as you described. How do you compensate for your inflation adjusted risk with such a long term? I imagine this is just one of many investments, acting as a pension or annuity of sorts for stabilisation with growth drivers in your other investments.

  2. Have to be careful of the laws now. There’s a limit to how many transactions a seller can finance annually now (three, if they meet certain conditions) under the Dodd-Frank Law. The Safe Act has certain requirements too. Still doable, but you want to make sure you’re aware of the regulations/limitations/responsibilities of both of these laws before entering into an agreement.

  3. Cheryl Carrier on

    I’m long term buy and hold – with a few flips thrown in. It is very important to know your seller and their motivation/needs. There was a time when owner financing was all I could get. Ask questions. Perhaps they want a safe return that beats CD’s. I’ve bought many times with owner financing. Many don’t even know the benefits. It is much more available in a bad market or dealing with older people who want a decent monthly check. In the early 90’s when the market went to hell, I renegotiated many terms on owner financing. I can still remember one guy telling me off the bat: “if you pay me off, I’ll be killed with taxes”. Can you imagine my smile! I’ve had others (smarter) tell me to try to find a better rate. My mother (almost 80) has lived off owner financing for years – of course, I always make sure that there is a significant pre-payment penalty.

  4. I’m in the long-term buy and hold camp. However, I’m also a Private Lender of short-term, high-interest Mortgage Notes. This is good for both new and experienced investors, who can’t get Bank financing. Buy property. Take a high interest loan for two years. Fix it up. Then sell and keep all the profit. Or, rent, refinance and hold for income.

    • Cheryl Carrier on

      Hi Susan, if I want to invest with a hard money lender what return is customary? I’ve been considering deploying some cash with a HML. What advice would you have? What due diligence is smart? Is it best to go solo? Thanks!

      • Since I believe due diligence is critical, I invest through Private Money Exchange.They provide the complete loan package. They’re very good at analyzing deals, have many repeat borrowers, offer loans of all sizes, with interest rates of 8 – 12%. All, loans are short-term, 6 months to 2 years, no pre-payment penalty. When I do an 18-mo. to two-year loan, I try to get at least one point up-front, in case they pay off early. I would start with something small, to get comfortable with the procedure. You can read my Blog at shcainfunding.com

  5. Another important thing to note here is from the SELLERs point of view. If you are intuitive enough to determine what type of buyer you are working with you can more effectively negotiate the deal by offering what the buyer wants most without giving away what they may not care so much about.

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