Self-proclaimed real estate experts still conduct seminars that teach people how to make money in commercial and residential property. Many of them are successful at convincing attendees that they can invest in property without utilizing any of their own money. While such assertions may be true in principle, they are terribly unrealistic in practical application.
Investing in real estate requires money. That money has to come from somewhere. If you are unwilling to put up the money, you will have to borrow it instead. But it is highly unlikely you will be able to borrow if you are not willing to jeopardize some of your own money.
The LTV Problem
Apply for a loan with a conventional bank or credit union and it is virtually guaranteed that you will be required to bring a down payment to the table. Furthermore, your loan will be subject to the dreaded loan-to value (LTV) ratio. In short, LTV is a percentage of the value of the property being purchased. If you wanted to buy a $100,000 property using a loan with a 75% LTV, the maximum amount you could borrow would be $75,000.
LTV requirements are not exclusive to banks and credit unions. Hard money lenders utilize them too. In fact, it is not unusual for hard money lenders to have lower LTV’s than banks. That is because they assume more risk, according to Actium Partners of Salt Lake City, Utah.
Lenders Want Borrower Participation
Actium Partners also says that lenders want active participation from borrowers. In essence, they want borrowers to have some skin in the game. Why? Because that forces them to assume at least some amount of risk with every acquisition. If borrowers risk nothing, how concerned are they about potential losses?
It is generally understood that investors will be more careful about what they do if they are risking their own money. They are more likely to be thoughtful about the properties they buy, the amount they pay, and so forth. Lenders want to see that sort of thing.
Lenders Want Realistic Expectations
The amount of financial participation offered by borrowers tends to be commensurate with their understanding of how the real estate market works. A borrower hoping to fund 100% of his investment demonstrates he has unrealistic expectations. It shows a lack of knowledge and business acumen.
On the other hand, borrowers who bring substantial down payments to the table show that they have a good handle on buying real estate. They know what it takes to get a deal done. And because of that, they are considered more trustworthy. Trust goes a long way towards securing lender approval.
Other Resources Aren’t Enough
Real estate investors have to be prepared to use some of their own money even if they aren’t going to a bank or a hard money lender. Despite what real estate seminars try to portray, other financial resources are rarely enough to cover the entire cost of property acquisition.
Investors can only rack up so much credit card debt. There are only so many people willing to contribute to property acquisition by way of their 401(k) and pension accounts. There is only a limited amount of cash available on peer-to-peer lending platforms.
Real estate seminars are known to convey the message that it is possible to make big money in real estate without investing a dime of your own. From a practical standpoint, this is just not reasonable. It doesn’t happen. If you want to make money in any kind of investment, you have to be willing to put your own funds in.