Re: This is STILL nuts . . . - Posted by Mike
Posted by Mike on November 05, 1999 at 23:16:29:
Haven’t you ever heard of a 125% home equity loan? That’s all this is, except the bank is the seller in the example the person posted, and it’s a 110% home equity loan, assuming the property is really worth only $100,000 (appraised value).
Don’t look at it as paying too much for the property, look at it as borrowing 10% of his FUTURE equity at a low rate, mortgage rates vice signature loan rates or credit card rates…and the payoff term is much longer, resulting in more cash flow. Also, since it’s secured by real estate, you can write off the interest.
It’s only a formula for disaster if you don’t use the money wisely and if you truely don’t expect the property to increase in value in the future and if your rent payment does not cover the mortgage payment. However, the rent doesn’t necessarily have to cover the mortgage payment if you use your equity money to invest in another property and the combined rents cover the cost of both mortgages. Note that the mortgage on the second property would be lower because of the down payment using the equity from the first property.
Bottom line is that it’s the overall situation that counts. Also, it’s not easy to borrow 5k down payments (for future properties) at mortgage rates. Sure, I could use credit cards for down payments, and I have at times, but it’s better to borrow equity in a home cause it’s cheaper and longer term. A good example is when I bought my home. I bought a 100,000 home for 85,000. I immediately turned around and got a 125% home equity loan, so I had about 35,000 to spend on acquisition of other properties, which I did. So I guess you could say that I paid too much because I now owe 125,000 for a 100,000 home. However, we both know that I didn’t, I’m just borrowing the future equity so that I could buy more property now. I used the 35k to buy 4 other in one year (used about 5-10k as down payments on each using my home equity loan). These amounts are amortized over 15 years and I pay 8%…very cheap down payment. I have lots of cash flow on the 4 rentals that more than covers the rental mortgages plus my first and second (home equity) on my home, and actually all my other bills.
If you can tell me where I could borrow a 35,000k 15 year loan at 8%, and one that I could write off the interest, I’d be glad to hear about it. You’d be doing us all a great service, but I think you’ll be very hard pressed to find a bank or private lender that will let you borrow that kind of money with those terms. Oh, my equity loan had zero closing costs.
Convinced yet? Perhaps not, and that’s ok. As you start investing you’ll quickly find that it’s hard to find money. If you are a serious investor, you learn ways to become very resourceful. You always have to be careful in managing your money. You never want to blow equity money (especially future equity) on frivolous purchases. You want to roll into another investment which increases your overall cash flow (if you hold/rent) and net worth.