Overleveraged properties can work. Im proof that it can work. You still need money in reserves though. AND…
You cant take money from the the property until you pay off your “borrowed” down payment.
So the cashflow all has to go towards paying down your downpayment. Not in your pocket to use personally =)
You still need money in reserves though to handle any rainy days that come your way. Also, are you buying this property with upswing potential? Any vacancies to cure? Expenses that can be reduced? Any slight rent increases forseable in the near future also need to be taken into account.
Hopefully there are some knowledgeable members who can help me with my situation.
I co-own a newly found company who invests in apartments and have a good connection of private money and financial sources to fund multi-million dollar properties once we have something under contract. The problem we face is that the earnest money required to tie these larger properties up can be around 20-60K. This is money we don’t have liquid since we are start-up. How can we overcome this obstacle? Is the only solution to go borrow this money privately and pay high interest on it until closing? Anyone with some thoughts or comments. Thanks
Re: Earnest Money Question - Posted by brandoncbsre
Posted by brandoncbsre on December 10, 2008 at 21:15:03:
I am 100% sure that this is not what you want to hear…
If you cant come up with the earnest money, you are shopping out of your league. What about reserves? Are you really thinking you are going to find a 100% private money financed complex that will actually cashflow?
Ray Alcorn has an article here on the dangers of overleverage. Here is the link:
I agree that 100% leveraged deals will not work and whoever is trying to make it work, good luck. Paying interest on a 1st and 2nd will definitely eat your cash flow away. BUT…just to set the case straight, this can be done if structured properly and doing it right now on a deal. Private money is brought in as a down payment and my realistic investment goal is to double his money while we hold the asset. The property can certainly produce this kind of upside. This works by not paying a dime in cash flow monthly to our investor, everything is back end profit. The investor will require a watchful eye and trust that you have the resources to make the deal happen. But if he’s making 2 million on the backside with 20%+ annual return and I’m making a six figure cash flow each yr, it’s a win win.