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Dangerously Over-Leveraged Real Estate Deals

Recently, Housingwire.com published an article indicating that now, it was possible for investors to finance 100% of real estate purchases.

This article is a little misleading and also causes some concerns about the financial sense in these sorts of loans. Typically, a hard money lender will loan the lessor of 100% of the cost of the real estate, or up to 70% of the Loan to Value.

The article goes on to say that an investor can get their hard money loan from a hard money lender, then go to a source such as SoFi and get a personal loan for the remainder, making up a 100% loan for the project.

This is a concept that can lead to being dangerously over-leveraged. Take for example a typical fix and flip project. When it comes time to sell, it’s advised to reserve approximately 8% of your working capital for closing costs, such as the realtor fee, title, home inspection, HOA fees, and Home Warranty. If you are already at 100% in your renovation, you are going into the wrong side of things when it comes time to sell.

Also, at any time in life an emergency can come up. If you are working a flip with 100% of the costs into a loan, you are over-leveraged if you need to sell quickly, and will come out the loser.

Occasionally, it’s necessary to refinance a real estate investment through a traditional lending source. These lenders will loan up to 80% of the value, and that must include their mandated mortgage insurance. That means you will need to come up with an additional 20% to close.

If you have used personal loans to fund your investment project, you’ve not only incurred higher loan rates, but your debt to income ratio is going to be high, causing you issues with qualifying for other loans.

Never overpay or over leverage when investing in real estate. Both are dangerous ways to lose much more than you gain.