INVESTMENT PROPERTY LOANS
Everything Is Negotiable, Right?
The Toll Booth—How Much Will It Cost to Get Your Deal Funded?
Financial leverage is the ultimate power tool for real estate investors, but there are costs of borrowing. How much does it cost to get funded? How can investors reduce those costs of doing business?
The Power of Leverage
We are all well aware of the dangers of over-leverage or borrowing from notorious Hollywood-style loan sharks. Yet there is no denying that financial leverage is a critical part of real estate investing, personal income, and wealth building.
The advantages of leverage include:
•Being able to invest in better quality properties and deals
•Investing for higher returns
•Enabling diversification
•Propelling gains and goals
The investor who leverages an additional $1 million in real estate today, and who is able to achieve just an average net return of 7.5 percent over the next ten years, would pocket an extra $1,061,031.56, thanks to compounding returns. Not too shabby, right?
Those results can always be scaled in volume, and time, too. You can use online compound interest calculators like Moneychimp to play with the numbers yourself.
Borrowing Costs + Investment Strategy
Borrowing the money to leverage real estate costs money. That’s how lenders make their money so that they can stay around and help you on future deals. The truly wealthy and savvy investors actually want their vendors, partners, and lenders to be fairly compensated. They understand the value in paying their vendors and partners a fair share.
However, the wealthy and successful are also known for being prudent with their financial choices. That means not unnecessarily overpaying. As financial icon Warren Buffett famously put it in the simplest terms, “Don’t lose money.” Let’s look at some of the borrowing costs that you can (and should) negotiate and save on. What’s most important before negotiating and shopping around for capital is to understand your goals and what type of borrowing strategy best aligns with your real estate investment strategy and goals.
There are four ways to strategize your funding costs:
1.Weighing higher up front costs with lower costs later
2.Postponing costs until later
3.Prioritizing lower payments and cash flow versus cost
4.Focusing on reducing total net borrowing costs
The approach you choose depends on your resources and the types of deals you are doing. For example, hard money may appear more expensive, but if it allows investors to gain better deals it may not mean a significant hit. Remember, part of something is better than all of nothing. Rental property investors may seek lower rates to maximize cash flow. Others just need to maximize financing up front so that they can generate larger sums later.
Common Borrowing Costs and Fees
Common costs associated with investment property loans include:
•Interest payments
•Prepayment penalties (in some states)
•Mortgage insurance
•Title insurance
•Property insurance
•Origination fees
•Points
•Application fees
•Underwriting fees
•Credit report fees
•Recording fees
•Transfer and sales taxes
•Prorated property taxes up front
Some of these costs are directly related to the loan and are lender fees. Others are third-party fees such as title and insurance costs. Others are local government fees (i.e., taxes and recording fees).
Everything Is Negotiable, Right?
Yes and no. Some costs, like government taxes, are hard costs. While you can’t negotiate the government fees, you can negotiate for your seller or buyer to pay them. Fees like lender points are more flexible. Everything is negotiable in terms of who pays what, and how much. So yes, everything is negotiated in some sense. However, your lender and other vendors will certainly have minimums they need to meet.
In most cases it is pretty easy to get lenders to shift costs around to meet your needs. This is how “no closing cost” loans are possible. It doesn’t mean they are free. It just means that they may absorb some of the up-front charges by rolling them into the loan and charging more interest. Those who want to pay less each month may choose to pay more points to reduce interest and monthly payments.
Use your loan estimate from your lender to shop and compare loan quotes with other lenders. Note that the annual percentage rate (APR) figure is usually the most significant in accurately comparing loan quotes and the true total cost of borrowing. Yet, you can’t afford not to make sure prepayment penalties, terms, and other factors are equal as well.
Negotiating Smarts
It never hurts to ask your loan officer to “do a little better” or drop a certain fee. Often that’s all it takes. However, investors must also know when to stop. If you’ve got a great loan officer, good lender, and a good loan offer that you can make work—go with the flow!
Prospective borrowers can absolutely go too far in negotiating. There is definitely a point at which the lender will no longer deem it worthwhile to win your business or close your loan. Beyond the risk of lending to you, the lender knows there are other borrowers out there who may be willing to pay more for the money and with less hassle. It takes a lot of people a lot of hours to work to get your loan funded. Would you flip houses or rent properties out for free? No one can afford to keep doing that.
It is also critical to note that in most cases speed, closing on time, and just actually getting your loan closed are probably worth more than spending extra hours trying to shave another $100 off an already great loan offer. So, try to get slightly reduced lender fees, and work with title and insurance companies to knock off a few bucks where you can, too. But know when you’ve got a good deal that you don’t want to blow.
Quick Tips for Negotiating Better Loan Deals
1.Talk to your loan officer about your goals and needs, and find out how they can arrange the terms to best suit you.
2.Make sure you are comparing quotes in an apples-to-apples way.
3.Always ask, “Can you do any better?”
4.Know when to take a good deal.
TAKEAWAYS
Prepare to fund your next property. Make a list of common lender fees. Then, do some preliminary research to get estimated costs for each type of fee. Use this same list as a checklist when you are comparing loan costs.