The traditional strategy to purchase real estate is to put 20 percent down and get a mortgage for the balance owed. The only problem with this strategy is that you will eventually run out of money for the down payment. Savvy real estate investors have adopted a new strategy that allows them to purchase a property with no money down. This strategy is called purchasing a property subject-to the existing mortgage. There are some potential legal liability you can face if you purchase a property subject-to.

When a seller has a financial hardship that prevents them from making their mortgage payment, they might be interested in quickly selling their house. As a real estate investor you can purchase this house by agreeing to make their mortgage payments. This allows you to purchase the house without seeking traditional financing that requires you to have a 20 percent down payment. There is already financing in place on the house and you just agree to continue making the mortgage payment. The mortgage remains in the seller’s name which is why it is referred to as purchase a house subject-to. You are purchasing the house subject-to the existing mortgage on the property.

With the recent downturn in the housing economy, home prices and values have dropped throughout the United States. In some states, home values have declined by up to 50 percent. With this decline both homeowners and real estate investors are struggling to remain current on their mortgage payments. Most people are not interested in making mortgage payments when their mortgage is worth tens or hundreds of thousands more than the value of their house. So many homeowners and real estate investors are walking away from properties.

Most real estate investors feel that they have no legal liability on a property that they purchased subject-to because their name is not on the loan. They feel they can stop making payments and allow the bank to foreclose on the property. The problem is that they can still be sued by the state attorney general or the seller. The fact that the real estate investor’s name is not on the mortgage does not resolve them from having legal liability.

With the increase in foreclosures, banks are becoming more aggressive on going after real estate investors that do not make the mortgage payments on properties they purchase subject-to. They are convincing the state attorney general to sue the real estate investor. There have been several recent court decisions against real estate investors that failed to make payments on subject-to properties. If you thought that you had no legal liability when purchasing a property subject-to, think again.

The first rule you learn when deciding to buy investment real estate is to protect your assets. No real estate investor will recommend that you operate your business as a sole proprietor. If you are a sole proprietor then your personal assets like your home, car and retirement accounts could be lost in a lawsuit. The best advice is to incorporate to limit your personal liability. The most common form of incorporation used by real estate investors is a Limited Liability Company or LLC. Some investors that flip properties will form a corporation. Now that you have your corporation, you decide to get financing to purchase properties and you find that banks will not let you get financing in the name of your corporation.

When banks lend you money, they want to make sure that you will be able to pay them back or that they can sue you to get their money back. When banks provide financing to individuals, the home is collateral for the loan. If you fail to make payments on the loan, the bank can foreclose on the property. In addition you provide a personal guarantee that the loan will be repaid. If the bank forecloses and sells the property at a loss, they can come after you for the difference because of the personal guarantee.

A corporation or LLC provides limited liability to you. If banks provided financing to the LLC, they would not be able to get you to sign a personal guarantee because of the limited liability afforded by the company. This puts the banks in a weaker position that could potentially limit their ability to get their money back. For this reason most major banks will not lend to someone who has the property titled in an LLC.

The good news is that this is not the policy for the every bank. Some smaller banks and credit unions will allow you to get financing in the name of a corporation. You will need to do extensive research to find lenders in your area that will do loans in the name of a corporation. Banks that specialize in commercial financing are more likely to do loans in the name of a corporation. The tradeoff for getting financing in the name of your corporation is that the bank will typically require a much larger down payment. The lower loan to value ratio provided by the larger down payment is the extra protection the bank needs in order to provide the financing.

Back in the olden days landlords use to send out invoices to tenants each and every month to let them know that their rent was due on the first. These invoices were very similar to the bills you and I would receive for our phone, mortgage, electricity or cable bills. The top part of the invoice would include the amount that was due and the date that it was due. If payment was made after the due date, the invoice would show the amount that you would have to pay including the late fee. The bottom part of the invoice would have a portion that could be ripped off as the payment coupon. The payment coupon could be included in an envelope with your payment. Read the rest of this entry

If you are a real estate developer and enjoy flipping houses, then you know how hard and time consuming it can be to get constantly financed from lenders. A good relationship with a bank is always a great way to ensure that you will have funds available when you need to purchase property. However, even banks can deny you once in awhile. Many developers turn to private money and private lending to obtain their properties.

The great thing about private money and private lending is that it can be a lot easier to obtain. There is no money down and no credit required. All you are doing is borrowing money from an investor and paying her back with interest. There is less paper work involved compared to dealing with a bank, and there are minimal costs involved such as the closing fees, recording fees and title insurance. Overall the fees are much cheaper with private lending and the approval time is much faster.

Real estate developers have found that it is easier to find and borrow private money. Most cities have investor associations to contact. Additionally, private lenders can go to your church, be a neighbor or be a family member or friend. Deals are typically done per property and the money is paid back upon sale of the property along with the interest. Developers like private deals because they go a lot faster with an approval time of about 48 hours and funding within 10 days.

There are more benefits to private money and private lending that make it worth it rather than going through a bank. The fast turn-around time and the lesser amount of paperwork make it very attractive. The funds are wired directly into the developer’s account and are available immediately to purchase a property. Once a real estate developer has developed a great relationship with a private lender, then it makes it all that much easier to borrow money for other investment projects down the road. As long as the private lender is getting her money back with the agreed interest, then getting another private loan should not be an issue.

If you are a real estate developer or are just getting into flipping houses, then you should think about private money from a private lender. Think about whom you know and what kind of connections you may have. Many individuals have pulled money out of their IRAs to invest in properties. It may seem almost impossible, but with a little research and asking around you just may find the right person who is willing to loan you the money. In the end if everything works out, you now have a solid private lender and may never have to go to the bank to get a loan.

Many investors are now finding that rental property can be an excellent way to create wealth. If you are considering getting involved in rental property investing, it is a good idea to educate yourself as much as possible. First, you need to find out what it takes to become qualified to purchase investment property because it is actually somewhat different than becoming qualified to purchase a regular home.

One of the reasons for this is the fact that a significant number of investors either walked away from properties or declared bankruptcy during the early 1990s. While you should certainly not be punished for someone else’s problems, neither do lenders want to be left holding investment properties. Therefore, it is important to understand that the requirements for being approved for a mortgage on rental properties are somewhat different from what you may be accustomed to.

While a home can often be purchased with a minimum down payment, especially if you are a first-time home buyer this is often not the case with rental property. Many lenders require a minimum down payment of 15%.

There are many different sources you can tap into for possible financing. These options include:
•    Mortgage broker
•    Local savings and loan or bank
•    Private lender
•    FHA; Federal Housing Association

Regardless of which option you choose, you will find that most lenders will want to be assured that you will have a sufficient amount of rental income in order to cover not only the mortgage payment but also other expenses such as insurance, taxes and maintenance. Depending on the amount of income that will be provided from the property, some lenders may require a larger down payment.

There are also different types of loans which you can use to finance the purchase of a rental property. One option would be a residential loan. This type of loan can be used to purchase from one to four units. The exact options that are open to you often depend on whether the property will be owner occupied.

Another option would be a commercial loan. This is an option when the property is five units or more or it will be non-owner occupied. Due to the fact that it is a commercial loan, it is often far different from a residential loan in regards to terms and requirements. One of the main differences between a commercial loan and a residential loan is the fact that fees and rates are frequently higher on a commercial loan. A larger down payment is also often required. The down payment on a commercial loan typically runs between 25% and 35%. While there are some lenders who may be willing to agree to a higher loan to value ratio; the requirements for qualifying for such loans are usually more stringent. The lender will also carefully examine the ability of the property to generate a cash flow that will allow you to repay your loan. As a result, the lender will typically examine the property to ensure it can provide an income that will not only allow you to cover the mortgage payments and other expenses but also provide enough of a cash flow that you will have additional income to place into a reserve account.

Private party lending is another option for many prospective investors. One option would be to approach the current owner about seller financing. With this option the owner carries back the loan for a down payment and fair interest rate. You may find that you can save lending fees with the options and may also be able to take advantage of making a smaller down payment.

Another option would be what is known as a hard-money loan. This is a type of short-term financing where a third-party makes a loan to assist the investor with purchasing the property. Generally, this type of loan involves a higher interest rate due to the fact that the buyer has poor credit or because the property is in disrepair and requires extensive renovation.

FHA programs are frequently offered through traditional lenders. Keep in mind; however, that FHS does not actually lend money. They do provide insurance for lenders; offering numerous loan programs.

Regardless of which financing tool you choose, remember that there is always the option to refinance at some later point in order to obtain a better rate and terms.