Many times when a new property investor is looking for funding to invest in a property they will turn to the equity that they may have built up in property that they currently own. This may give them an option to take advantage of cash out refinance and glean the money that they need for the new property investment this way.
Although there are several ways to do this; such as taking out a second mortgage, many will opt to go for cash out refinancing options. If this is the route that is taken, what happens is that the original mortgage on the equity property is simply refinanced at the higher amount that is needed, in respect to the equity that has been built. So it still remains as a single loan, however there are now new interest rates and new terms, and it could even have been done through a totally different financial institution.
The question that is often raised though, is what is the advantage to doing a cash out refinance as opposed to obtaining a second mortgage?
To begin with it may be much easier to do a cash refinance rather then trying to obtain a second mortgage, and it should also be realized that normally the interest rates on a second mortgage are always higher then what one would be able to get on a first mortgage. However it has to be considered that if the first mortgage has a really low interest rate on it, which is much lower then the current rates, it might not be a wise financial move to close out the original first mortgage in order to get a cash out refinance.
By doing the financial calculations it may work out that even with the higher interest rates on a second mortgage it is still going to work out to be less of a pay back than doing a cash out refinance.
It’s important to check out all avenues when trying to arrange financing for a property investment. Before making any decisions concerning a cash out refinance, or opting for a second mortgage, one should speak to their financial institution to see if there are other financing possibilities that may not have been aware of.
However, it must be remembered that the equity is built in a property is certainly usable as collateral or at least a certain percentage. The key to arranging good financing for property investing is to think outside the box and do all the figures and calculations from all angles before making any decisions.
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Smart real estate investors know that the best way to make money in the real estate investment market is to use other people’s money and trade their own expertise and negotiating skills for a slice of the profits.
As a real estate investor of many year’s experience and with a certain reputation for closing lucrative deals I am constantly being approached by groups of investors who want to break into the real estate market without risking huge chunks of their money and without having to go through the painful learning curve that’s often associated with investing in a market you know little about.
I am in the advantageous position of being able to wait until a good deal comes along and then choosing the group of investors I will work with. This, in essence, is what a syndicate real estate deal is. Rather than put up all the money, investors put in a percentage which will reflect their percentage of the profits, thus minimizing their exposure in each single real estate deal.
The question is what do you do if you have not yet got a reputation but can still pull off a profitable real estate deal and do not want to risk your money? Well, this is where you need to be creative. The moment you have a deal you think you can close at a profit you need to move fast to get your syndicate together.
Potential real estate investors willing to put their money up can come from almost anywhere: friends, family, colleagues, people you work with, acquaintances, business angels and professional investors who earn their money by investing through syndicate deals. The list is almost endless and putting a syndicate together will depend on two things, first the kind of deal you think you can close, which will also determine the profit margin and the maximum number of people you will want to come in and second on how convincing you are in getting people to trust you with their money and give you a free hand so you can make it work for them.
If, right now, you are thinking that there is simply no way you can say anything to anyone to get them to trust you with a few hundred thousand dollars you can think again. Putting together a syndicate and fronting it is very much a case of cool judgment, steady nerves and the ability to negotiate carefully, pay attention to detail and find new ways to squeeze profit out of a real estate investment.
Good news travels fast and it usually takes no more than one successful deal to get you a reputation in which case you will find that then people trust you enough to want to come to you rather than you having to hunt for them and that is the hallmark of success.
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As you may well know by now, private money funding is one of several options you have for funding a commercial real estate deal. The real trick is to know where to find such funding, and then to know how to lock it in so you can properly use it. I’ve used my share of private money over the years and what I’ve found is that private lending success comes from two key things: how you present yourself and how you present the deal.
Presenting yourself to a private lender needs to revolve around your professionalism and your commitment to the types of deals you do. For this reason, a simple summary proposal is a nice touch, when you first begin visiting with a particular lender. In such a proposal, you can provide snippets of your business philosophy, history, experience, etc. You can also show examples of how you would handle a particular deal, giving a lending prospect a quick idea of what it is like to do business with you.
There are several ways to put together a summary proposal and there are a similar number of things you could call it. The bottom line is that if your business is worth telling people about, it’s also worth putting in writing, and a person looking to learn more about you is less likely to want to read a full-blown business plan that is less relevant to their immediate interests.
Once you have gathered some interest from private lenders (not to understate the importance of this step), the next step is to actually present a deal to them when one comes your way. How you do this will be very important, given that your credibility with a seller will be somewhat dependent on your ability to not only attract funding, but also have it when you need it most.
When putting a project summary together, remember the key components that are important to you when you evaluate a commercial deal for your own business. First, there is the price tag, which should be competitive, relative to market value. Second, there are the market conditions, which should show some stability and also signs of good future growth. Last, there is of course the property’s cash flow, which should be acceptable to all parties involved. Once the basic elements of a deal are in place, then you can really dive in and start negotiating the terms of use for a private lender’s funds.
Don’t ever forget that using private money is serious business, so make sure you have a good team in place to support your efforts, and be sure to treat a private lender’s funds as carefully as you would your own. These two things can really simplify the use of private money and open key doors of opportunity for your commercial real estate business.
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Huntsville, AL .. August 28-30 2009
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