Posted by Jimmy on December 18, 2002 at 20:06:41:
if you do the numbers, you will find that an 80% loan is your best bet, with a standard 20% cash down payment. But after a few deals, you, like me, may find you cash position a little light.
at that point, you will look for 90% financing on the next couple of deals. and the financing is still pretty good, except for the PMI.
and then, maybe 95%, if the cash flow is rich enough.
and soon after, another deal finds you, but cash is really tight. and the seller is not interested in taking back paper, but the deal is still a good one. that’s when a person with super credit may want to consider the 100% third party financing. and yes, 100% financing is a little scary, and the money is more expensive (mine was an effective rate of 9%, not 12%).
but don’t stop there. for a variety of reasons, that alternative may not be available. now we look for a seller who will take back some paper. and, if arranged properly, the seller will be cashed out of their position soon after the deal is consummated. but doing this requires an artificially inflated purchase price. Does this make is a bad deal? No. But it should not be the first choice.
and every deal should be carefully examined for debt coverage issues. if a deal is positive by a factor of 2.5 to 1, like the ones I do in small town Texas, 100% financing is not a problem.
and when none of these options are available, and the deal is available, find a partner. Part of something is better than all of nothing.
Bottom Line: “Always” and “Never” should be eliminated from your lexicon. Borrowing at 9% or 10% is OK is the cap rate embedded in the deal is 14%. But you have to know your deal and know your market. Traditional fianicng is your first choice, because the cost of borrowing is lowest. As you work you way down the prioritized lsit of financing options, you wil also be raising the bar for the deal. A lot of deals can handle traditional 80% financing. Fewer deals can tolerate 100% financing. Know this in advance.