The Right and Wrong Ways to Buy Real Estate
I have three golden rules of real estate investing:
- Do not write big checks.
- Do not jeopardize your credit.
- Do not make promises you can’t keep.
Keeping these points in mind, I firmly believe that there are right and wrong ways to invest in real estate. The wrong way assumes you take all of the risk and use your own money. The right way is risk-free to you, without needing your own cash or credit.
The Wrong Way
Using your own money and credit would be what I consider the “wrong” way to invest in real estate. Why is it wrong?
- You have to pay large down payments (meaning you need large amounts of cash).
- You must have good credit to qualify for a bank loan.
- Even if you do qualify for a loan, you are taking all of the risk.
- You are limited by debt to income ratio in terms of the number of loans you can have, meaning you may not be able to invest in multiple properties simultaneously.
- Interest rates for loans are higher for investors.
What if you could become a real estate investor without putting your assets at risk or having large amounts of cash on hand? I firmly believe that investing should increase the quality of your life, not make you risk everything you have worked so hard to achieve.
The Right Way
What if you could use other people’s money to invest? This is what I consider the “right” way to invest in real estate.
You can use the existing financing on the property, which is guaranteed by the seller, this enables you to get deals without taking the risk.
I have a great example of the right way to invest in a story by one of my coaching students:
A seller was not yet in foreclosure but was having trouble affording the payments on their home. The seller saw marketing by my student and reached out to him for help. The home was only a few years old and in beautiful condition. The Fair Market Value of the home was $190K, and the seller’s first loan balance was $180K. It wouldn’t make sense as an investor to pay that amount. The student was able to educate the seller on the high costs of selling and the amount of cash they would need to bring to the table. Instead, the seller deeded the home to my student, leaving the current loan in place. My student got full ownership rights, and he was also given the cash that the buyer would have had to bring to the table in a traditional sale. Essentially, he got paid to buy the house.
The student used what I call the subject-to method. Why did the seller agree to this? Easy, they just wanted out. They wanted an immediate peace of mind and the ability to walk away from the financial strain and move on. By using my subject-to method, the student was able to help the seller out of a very tough situation, and the seller avoided damage to their credit. Everybody wins!