Real Estate Investing – Financing

Many of us approach real estate investing, financing it with credit or loans from a bank. But the truth about getting into this field is that when getting involved with real estate investing, financing it using credit can actually be unnecessary, as well as the use of loans, and even any dealings with any and all banks just aren’t needed at all. The main ingredient to establishing this prowess of smooth and unfettered real estate investing, financing it all without any of these, is of course, knowledge.

To accomplish this doesn’t take mere “tips and tricks” that are only doable in isolated situations, or only if the circumstances are just right… there really exist techniques of going about real estate investing without financing it with these common means. Good credit or bad, it really needn’t enter into the picture whatsoever. Banks and loans can actually be a hindrance in many situations, so to heck with them.

Moreover, using these techniques aren’t just practiced by those who simply can’t do it otherwise, such as those with little or no capital, but by the most successful investors in real estate, for whom the more common ways of financing their ventures are no problem at all. Sure, they could go through the process of real estate investing, financing it using these common establishments, but if things could be done far quicker and more profitably without them, then really, why bother? Like the saying goes, “Work smarter, not harder”. These “underground techniques” are the best way to approach real estate investing, financing it without credit, banks or loans, or even with nearly no capital.

Real Estate Investing FAQ – How Do I Fund My Deals?

Another question that new and inexperienced real estate ask over and over is, “How do I fund my real estate deals?” Because I hear this one so frequently, I’ve added it to my list of real estate investing FAQ (Frequently Asked Questions). I’ll attempt to answer it in this brief article.

There are several ways to find funding for residential real estate investments, and the primary way is with an investment property mortgage. This is the most straightforward way because you simply apply for a loan with a mortgage lender or bank like you would in any other real estate transaction.

You, the property, and the deal must all qualify according to the lender’s underwriting guidelines, which basically means you need good credit, property in good condition, and cash or other equity in the deal. When these are all in line, the loan is approved and the deal moves forward to the closing.

A second type of funding is the “hard money” loan. Hard money lenders loan money based solely on the equity position in the deal, meaning if you buy at a low enough price, hard money should be available to you. Hard money loans normally are based on a percentage of the “after repaired value” of the home, and the usually include enough to buy, repair, and hold the property for a few months, until it can be resold.

Unfortunately, hard money is very costly. Often, you must pay several points just to get a hard money loan, and the interest is high, often between 10 and 15 percent. You need to take this into careful consideration before you agree to a hard money loan on an investment property.

Another, often overlooked, funding option for investment property is private loans, also called private money for real estate. Sources of private money are limited only by your imagination and include family, friends, partners, trusts, and even complete strangers. Some savvy investors create groups of private money partners they can call on when they have a good deal, paying interest on the loans and providing a security interest in the property.

The final funding source we’ll cover in this article is your own, self-directed IRA. Using IRA retirement funds in a self-directed real estate investment has become very popular, and is an excellent alternative for those who have IRA funds available to them.

And Then There Were None – High Finance Finagling Takes Down the Top 5 Investment Banks

The first of the top 5 investment banks to fall was Bear Sterns, in March of 2008. Founded in 1923, the collapse of this Wall Street icon shook the world of high finance. By the end of May, the end of Bear Sterns was complete. JP Morgan Chase purchased Bear Stearns for a price of $10 per share, a stark contrast to its 52 week high of $133.20 per share. Then, came September. Wall Street, and the world, watched while, in just a handful of days, the remaining investment banks on the top 5 list tumbled and the investment banking system was declared broken.

Investment Bank Basics

The largest of the investment banks are big players in the realm of high finance, helping big business and government raise money through such means as dealing in securities in both the equity and bond markets, as well as by offering professional advice on the more complex aspects of high finance. Among these are such things as acquisitions and mergers. Investment banks also handle the trading of a variety of financial investment vehicles, including derivatives and commodities.

This type of bank also has involvement in mutual funds, hedge funds, and pension funds, which is one of the main ways in which what happens in the world of high finance is felt by the average consumer. The dramatic falling of the remaining top investment banks affected retirement plans and investments not just in the United States, but also throughout the world.

The High Finance Finagling That Brought Them Down

In an article titled “Too Clever By Half”, published on September 22, 2008, by Forbes.com, the Chemical Bank chairman’s professor of economics at Princeton University and writer Burton G. Malkiel provides an excellent and easy to follow breakdown of what exactly happened. While the catalyst for the current crisis was the mortgage and lending meltdown and the bursting of the housing bubble, the roots of it lie in what Malkiel calls the breaking of the bond between lenders and borrowers.

What he is referring to is the shift from the banking era in which a loan or mortgage was made by a bank or lender and held by that bank or lender. Naturally, since they held onto the debt and its associated risk, banks and other lenders were fairly careful about the quality of their loans and weighed the probability of repayment or default by the borrower carefully, against standards that made sense. Banks and lenders moved away from that model, towards what Malkiel calls an “originate and distribute” model.

Instead of holding mortgages and loans, “mortgage originators (including non-bank institutions) would hold loans only until they could be packaged into a set of complex mortgage-backed securities, broken up into different segments or tranches having different priorities in the right to receive payments from the underlying mortgages,” with the same model also being applied other types of lending, such as to credit card debt and car loans.

As these debt-backed assets were sold and traded in investment world, they became increasingly leveraged, with debt to equity ratios frequently reaching as high as 30-to-1. This wheeling and dealing often took place in a shady and unregulated system that came to be called the shadow banking system. As the degree of leverage increased, so too did the risk.

With all the money to be made in the shadow banking system, lenders became less choosy about who they gave loans to, as they were no longer holding the loans or the risk, but rather slicing and dicing them, repackaging them and selling them off at a profit. Crazy terms became popular, no money down, no docs required, and the like. Exorbitant exotic loans became popular and lenders trolled the depths of the sub-prime market for still more loans to make.

Finally, the system grinded almost to a halt with the fall of housing prices and increased loan defaults and foreclosures, with lenders making short term loans to other lenders being afraid of making loans to such increasingly leveraged and illiquid entities. The decreased confidence could be seen in the dropping share prices as the last of the top investment banks drowned in shaky debt and investor fear.

September saw Lehman Brothers fail, Merrill Lynch choose takeover over collapse, and Goldman Sacs and Morgan Stanley retreat to the status of bank holding companies, with potential buyouts on the horizon. Some of these investment banks dated back nearly a century, and others longer, such as the 158-year old Lehman Brothers. Quite an inglorious end for these historic giants of finance, destroyed by a system of high finance finagling and shady dealings, a system that, as it falls apart, may even end up dragging down the economy of the entire world.