financing secrets of a millionaire real estate investor.pdf

4/Working with Lenders 45
With larger commercial projects, the lender’s main concern is
the financial viability of the project itself. In that case, the borrower
does not necessarily have to sign personally on the promissory note.
The lender’s sole legal recourse is to foreclose the property.
With smaller residential loans, the investor/borrower signs personally
on the note and is thus liable personally for the obligation.
While the lender can foreclose the property, there may be a deficiency
owed that is the personal obligation of the borrower. In the
late 1980s, many leveraged investors learned this lesson the hard way
when they were forced to file for bankruptcy protection. A smart
investor finances properties with a cash cushion, positive (or at least
breakeven) cash flow, and at a reasonable loan-to-value ratio.
Nothing Down
While “nothing-down” financing is viable, it does not necessarily
mean a 100 percent loan-to-value. For example, buying a $150,000
property for $150,000 with all borrowed money is not a bad deal if the
property is worth $200,000. That’s a 75 percent LTV. Buying a property
for close to 100 percent of its value and financing it 100 percent
with personal recourse is very risky. If you don’t have the means to
support the payments while the property is vacant, you may be in for
trouble. Like any business, real estate is about maintaining cash flow.
So, in considering your loan, factor in the following issues:
• Are you near the top of an inflated market
• Is the local economy’s outlook good or bad
• If purchasing, are you buying below market
• How long do you intend to hold the property and for what purposes
• Are prices likely to drop before you sell it
• Will you be able to refinance the property in the future