Thursday, December 13, 2012

Important Rules for Financing

  • Rule #1: Get the money for as long as possible.  
  • You know you are going to need more money to purchase future properties so why would you want to be required to pay this money back any sooner than absolutely necessary? 
  •  That would just require you to get even more money later.  That may be difficult or impossible to do, and of course borrowing new money always has a cost. 
  • As such you should prefer terms on your loans that are as long as possible.  If you need access to more money in the future, the last thing you want to do is take out a 15 year mortgage on a property you are buying today. 
  • This will require larger payments resulting in significantly reduced cash flow.  If your business is generating less cash that will extend the amount of time it takes to generate enough cash to purchase your next property.  This is why I always prefer 30 year mortgages even if the interest rate is slightly higher.

  • Rule #2:  Get as much money as you can get.  
  • Maybe you have enough cash to put 50% down on a property.  Maybe you just feel more comfortable only being leveraged 60% instead of 75%. 
  • There can be any number of reasons why you might choose to borrow less than the maximum.  Don’t do it.  
  • If you are borrowing on a given property, borrow the maximum you can get on it.  If you are more comfortable with lower leverage then buy every third or fourth property with cash, but do not take out 50% or 60% loans on a property.  
  • Always take the maximum they will give you.  It is always more difficult and more expensive to get more money out of a property once you have a mortgage on it.  
  • If you purchase a property with all cash you can go back and borrow against it later.  When you do, you should once again borrow the maximum amount that they will give you.  You can manage your own leverage ratios across all your properties to ensure you do not over leverage yourself but do not put smaller leverage ratios on each property