How to Recognize and Avoid 8 Real Estate Financing Mistakes

Real estate investing may seem like it’s either easy or hard, and both may be correct. The secret oftentimes is dependent upon how the investor manages his or her Real Estate financing.  Nothing can be more discouraging than to structure a great real estate investment and then have everything come apart because of financial pressures that could have been avoided.

Possibly the problem occurs because of how the investor structured the purchase and financing, or maybe it’s because of outside personal financial pressures. Regardless of the cause, the problem is real and should be avoided.

Avoiding the financial problem in the first place is by far the best course of action, but unfortunately, that doesn’t always take place.  Recognizing the problem or mistake is only the diagnosis, but now you must take corrective action.  It’ going to be a process that can take both time and effort.  Once you recognize the mistakes, you can take action to avoid these problems altogether.

Mistake #1 – Not Obtaining Accurate and Complete Information on Past, Present and Future Expenses

You can’t expect to achieve success in real estate investing if you do not have accurate records of past expenses involving the property.  This includes all expenses related to the property itself including utilities, taxes, and especially repairs.  If the appliances pertaining to the property have been repaired in the past, you want to know when the repair occurred and what the actual expenses were.

It’s entirely possible that you will need to repair or replace the same items again.  You also want to know if there is any warranty on the work performed.  Failure to get this information forces you to become responsible for additional unexpected repairs.

One of the primary reasons for having a complete inspection report on the property prior to closing is so that you can understand and project upcoming expenses.  You must be prepared financially for repairs and maintenance to the property.  When you aren’t financially prepared for large upcoming expenses, you put yourself in jeopardy of losing the property.

If you are purchasing a rental property, you want to have a complete history of not only the revenue received but of all expenses associated with the property.  In essence, you are purchasing the new rental business.

Mistake #2 – Accepting Poor Owner Financing

Owner financing involves the seller financing the sale of the property to a buyer and can allow the buyer to achieve financing without normal banking approval.  With a traditional mortgage, you borrow money from a bank to pay for the property.

Then, you make payments back to the bank to pay off the loan. With owner financing, you make arrangements to pay the owner in installments, typically of principal and interest, until you’ve paid off the purchase price of the property.

Owner financing can be a valid and profitable way to purchase real estate, but you must ensure that you are not going to assume unwanted problems.  If at all possible, you should attempt to certify that the property is free and clear of Mortgages.

If this is not the case, you could be in jeopardy if the owner doesn’t make payments on the underlying mortgage.  You can solve this if you escrow a portion of your payment to go for payment to the underlying mortgage.

If the owner has legal or financial issues, the property is still in potential legal jeopardy and could be foreclosed on.  If the property is free and clear, you can get a title policy and have the owner actually take a first mortgage against the property and act just like a bank.  In this way, the property is transferred by title to you and is no longer in the name of the seller.

If you elect to pursue owner financing, make sure that you are protected in the case of the seller not paying any underlying mortgage.

Mistake #3 – Taking a Hard Money Loan with Unreasonable Terms

Hard money loans are loans made almost entirely based on the value of the property without regard to the creditworthiness of the borrower.  These loans are normally bridge or short-term loans and come with higher payments and interest rates than traditional loans.

The lenders are generally private individuals or entities and they are relying primarily on the value of the property if it were to be sold to pay the loan. These hard money loans have a lower loan to value ration than traditional loans and they generally have a loan period of one to three years.

Most of these loans are used when the property is going to be fixed up and resold.  Because the interest rate and payments are higher, along with a short-term payment period, you may be subject to an increased risk of foreclosure if your real estate business doesn’t go as planned.

If you elect to pursue a hard money loan, make sure that you are getting a loan with terms that are reasonable for your real estate business.  Don’t be caught unaware when the loan or payments come due and you don’t have means to make the payments.

Mistake #4 – Assuming Existing Loan with Underlying Problems

Not all real estate loans are the same, and when you assume a loan obtained by a previous borrower, in your case the seller, you will be subject to the terms of that loan.  Maybe the existing loan has restrictions or payments that don’t meet with your real estate business plan.

Take for example a loan with a balloon payment due in a short period of time.  An unexpected balloon payment could destroy your real estate investment.  If you were not projecting the large balloon payment, it could literally put your real estate investment into foreclosure.

Many real estate investors enter into adjustable rate mortgages that have increased interest rates.  As the interest rate goes up, your profits are going to go down.  Don’t be caught unaware of the potential increase in payment, nor on the potential for a requirement that the loan is paid off entirely in a short period of time.  This could occur in a matter of a few short years or even months.

Mistake #5 – Ignoring Potential Legal Problems

As a real estate investor, you should be cognizant of all potential legal problems involved with your real estate endeavor.  This includes not only your personal actions but the actions of other people who may be involved with your property.  Take for example an owner who is being sued personally from past tenants or even individuals who worked on the property.  If the previous owner had work done on the property and did not pay the person doing the work, there is a potential for a special kind of lien to be levied against the property.

These liens are called mechanic liens and are best described as a security interest in the title property for the benefit of those who have supplied labor or materials that improve the property.

Your seller may be facing legal problems of a personal nature, and if the seller is unsuccessful in such circumstances, the property could be subject to potential liens.  Make sure that you acquire the property in such a way that you get a title policy on the property that ensures that all seller legal issues are resolved.

There are also potential legal problems between yourself as a landlord and the tenants in any rental property.  It is highly recommended that you secure an umbrella insurance policy to protect yourself against such occurrences.

Mistake #6 – Not Vetting Existing Tenants

A major financial mistake that plagues real estate investors who acquire rental properties is having non-paying tenants.  There is no guaranteed that you can always secure great tenants, but you can do several things to improve your tenant payments.  When you purchase a property, ask for all rental records for each tenant.  If you have one or more existing tenants who have shown that they don’t always pay their rent on time, you need to make sure you correct this situation.

Perhaps you can get them to agree to use an auto payment program in return for not raising the rent.  Whatever incentive you come up with, you need to do all in your power to increase your success in collecting rent.

SEE ARTICLE: (Link to article written by Gary Cochran “Follow a 7 Step No-Fail Checklist When Purchasing Your 1st Rental Property”)

When you become a landlord, you are automatically assuming the role of rent collector.  It is critical that you establish strict payment policies with both old and new tenants.  If you have already identified a potential problem through existing financial records, try to replace bad tenants with good new ones.  If it’s not possible to do this, it might be best for you to pass on this specific rental property.

Mistake #7 – Purchasing Property with Excessive Leverage

When you purchase property with borrowed money, you are using leverage to potentially increase your return on the real estate purchase.  If you purchase a property with a one hundred percent (100%) leverage, you are borrowing the full purchase price of the property.  When you have excessively high leverage in real estate, you put yourself at risk of potentially losing the property through foreclosure if things don’t work out exactly as planned.  If you are in such a situation and expenses become larger and rents don’t come in as planned, you could be in danger of not having enough money to meet mortgage payments.

Most traditional lenders have found that if the borrower has at least a 20% down payment, they are in a much better position to have the borrower make payments.  It has been proven that excess leverage in real estate leads to much greater risk.

Mistake #8 – Excessive Personal Debt

Most financial mistakes can be overcome if the borrower or real estate entrepreneur has sufficient capital to meet future expenses.  If you are a new, or even experienced, real estate investor and you have a very high debt load, you are already in a position of risk.  The higher your personal debt, the higher your risk.  When you have excessive debt, you automatically are in the position of having to pay out more and more of your income.

In many cases you may feel it necessary to draw too much on the income coming from your real estate investments.  This puts those investments at risk.  It is recommended that you reduce your personal debt as much as possible when entering into real estate.

Financial mistakes in real estate investing are far too common.  Sadly, most of these problems can be avoided if we take the time and make the effort to follow proven solutions.

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Building a Sustainable Business in Real Estate

Building a Sustainable Business in Real Estate

Hopefully you are looking at your real estate investing as a business. And as such, you want it to be a sustainable business that will grow well into the future. The most important part of building a sustainable business is the foundation you create in the beginning. You need to be willing to invest the time to create a solid foundation that will allow you to grow your business to meet your long-term goals.

There are several personal ingredients that will help you stay the course long enough to create that solid foundation. Things like commitment, persistence, patience, motivation, and vision are all important to your long-term success.

It is easy to get very excited and want to make money as fast as possible. But it is also easy to go out and lose money when you don’t invest the time necessary to put the right pieces in place. For example, in wholesaling, the first piece of a solid foundation is having qualified cash investors. Without qualified cash investors, you do not have a solid foundation. Without that solid foundation, your work is going to be harder and your stress level is going to be greatly enhanced. Also, the more qualified cash investors you have, the more money you can make, so having a mindset of always adding more qualified cash investors is always adding to your business foundation.

A very important piece in the foundation of your business is your vision, which is based on the goals you have for your real estate investing business. The vision you have for your business is a key piece that will help you maintain your motivation. The goals you have for your business will help with your weekly planning and decision making.

Another key piece is having clarity of your values. You want to know and make those decisions ahead of time. It can be easy in real estate investing to make money in a greedy or unethical way, but it is not necessary nor does it have a long-term focus. There is plenty to go around, and your focus should be to have your deals be win/win.

Be willing to invest the time necessary to build a solid foundation that will allow you to grow your business well into the future.

Using your IRA To Acquire Investment Properties

Using Your IRA to Acquire Investment Properties (Updated)

Depositing savings into a self-directed IRA could be a wise choice for those who are looking for long-term tax-free real estate investment (specifically buying investment properties). Whether this is a good choice for you depends on the circumstances.

Eligible properties

The purchased real estate must be used for business purposes an example would be private homes, secondary residences or weekend estates do not qualify. Similarly, purchasing a property already in your possession is not allowed.

The governing rules state that in any case, it has to be a new purchase directly into the IRA.

On the other hand, you would be allowed to buy real estate into a self-directed IRA for flipping purposes. There is an annual limit on the number of purchases and sales you can make, all profits will be tax-deferred or tax-free. Thus your IRA will grow without any deductions.

IRA investment concerns

You are not allowed to get a mortgage loan in an IRA. If you’re planning on keeping real estate as a long-term rental it’s essential to have enough cash from your IRA to purchase the property. Don’t forget the IRA carries administration costs, that should be considered in your financial plans.

The IRA investment depreciation or other kinds of losses will not result in tax savings.

Have a Plan B

Most people will lose out because they fail to diversify their savings. Considering the option of failure and spreading out your investment. Investing wisely and having a plan B can save you a lot of money in the long term.

Disclaimer: The Company introduces general information and education concepts about self-directed retirement accounts (such as 401(k) and IRA accounts). Like any investment, there is a risk in using retirement funds for investing in real estate assets.

It is possible to lose a portion or all of an investment in real estate – including those purchased with retirement funds.

Please review IRS Publication 3125 regarding the use of retirement funds for alternative investments. The document can be found at Every individual is different, with unique circumstances. We do not offer tax, accounting, financial or legal advice.

Prior to acting upon this information, consult your own accounting, legal and financial advisors to evaluate the risks, consequences, and suitability of that transaction. The Company is not a retirement account custodian, trustee, or securities dealer.

Facts about real estate investing

Real Estate Investing EducationFacts About Real Estate Investing (Updated)

Real estate investing refers to the buying, ownership and manning of real estate for the purposes of generating profit. It’s a popular form of investment that requires proper management. Good management could yield the desired result but like all investments, it is not without its risks.

This is often the case when the investor doesn’t take into account the limited liquidity and the capital-intensive nature of the investment. Since the investment is actually capital intensive, it’s the form of investment that could require upfront capital.

Keeping in mind the risks of investing, and learning how to properly navigate them, is important if you are to successfully invest in Real estate market.

Like other investments, the successfulness could depend on whether or not cashflow is being generated by the actual investment. Investment failure in real estate is often as a result of the investor being plunged into a negative flow of cash for a prolonged period of time.

If you’re an investor and you decide to resell your property at a lower price, you may incur losses.

Most investors often fail because of this factor. Luckily, there are a variety of strategies and tactics designed to help you navigate the risks of the current markets.

Sometimes real estate investing involves taking chances as they arrive. A good example is buying real estate during a period when prices have dropped significantly. You can choose to hold on to your properties until the prices have risen.

This strategy, buying at the bottom, has the potential to yield great returns in the future as properties further appreciate and values increase.