Bad Financing Can Kill Your First Real Estate Investment

There is a seemingly endless list of potential mistakes you can make when you make your first real estate investment. However, one of the worst mistakes you can make is settling for a “bad financing” deal. It can be one of the most lethal mistakes you can makeand can kill you off before you have a chance to get started.

What Constitutes Bad Financing?

Everyone seems to have a different opinion of what constitutes a bad loan, but here are the most common signs you are getting a bad deal on the money you need for your first real estate investment:

  1. Interest rates too high
  2. Interest rates that are not fixed
  3. A high monthly payment
  4. A monthly payment that balloons after a set period of time
  5. A personal recourse requirement

Currently, most banks are willing to work with you to help keep you from making the first four of these mistakes particularly since current interest rates are low at the moment for 15 and 30-year fixed rate loan, and currently,loans with balloon payments are not a thing with reputable lenders.

The Big Problem

The last of the five is why you need to be very careful when searching for a loan. Personal recourse or access to cash reserves or assets that you can use to personally guarantee the loan. In certain instances, this might be a reasonable request, depending on your situation. You may find hard money lenders, commercial loans, and private lenders that are willing to extend the loanto you. However, since they are not likely to meet any of the above criteria, these lenders are not the best choice for your first real estate investment.

Let’s look at this situation from another point of angle. You borrow the money you need for your investment from a hard money lender at 12% interest, the monthly payment is largerthan you can honestly afford, and to make matters worse, you have a balloon payment due in anywhere from 12 to 36 months. To cap it all off, you have to provide full personal recourse for the loan. All of this adds up to a situation that is far too risky to even consider.

Why is This Such a Problem?

When you buy a property under these conditions, you are likely to experience negative cash flow and a high interestrate on your loans. If your loan has a balloon payment and increases in your mortgage payment, you may find you have to push the sale faster than you planned or try to refinance. Which even if you have perfect credit can be hard to do in this era of tighter lending practices.

Then, if anything should go wrong and you end up owing your lenders money because you can’t make your payments, thanks to personal recourse, your lender can come after you and your personalassets could come under fire as the lender attempts to recover their losses. By using a private lender or seller financing, you can virtually eliminate many of the risks you face and make your first real estate investment experience a positive one.