Business & Finance Investing & Financial Markets

Creative Financing Creates Liquidity With Multi-Family Buildings

One of the great buzz words in modern investing is 'liquidity'.
To be liquid is to be flexible, to be able to move money from place to place as needed, and to have the available cash to act on great opportunities that arise.
The opposite of liquidity is to have either no cash or to have valuable assets and yet no way to efficiently leverage them.
Clearly, you can see how valuable liquidity is in the modern economy.
There are two primary ways for real estate investors to invest effectively in properties while maintaining their own valuable liquidity.
Admittedly, this idea is not exactly from the 'old school' line of thinking, but you'll soon see why sometimes new ideas aren't so bad.
It used to be that real estate investors saved money, made down payments, and secured bank loans to purchase investment properties.
Not a bad formula, if you place no value on being liquid.
An investor with five 'old school' rentals might have $100,000 or more of his/her own cash tied up in down payments for these rentals.
While the down payment still has paper value in the form of equity, this value is not liquid and would thus put the same investor at a disadvantage in the modern economy.
Now let's compare this scenario to one where liquidity is a stronger criterion.
Investor B has the same $100,000 to invest but, instead of sinking it into a down payment on a half million dollar multi-family building, uses the money as leverage (proof of down payment funds) to secure approval for an 80% LTV bank loan (in this case $400,000).
At this point, Investor B stops here and chooses a different path than his 'old school' predecessor.
Instead of committing the down payment funds and losing his liquidity, Investor B seeks out motivated sellers who have some equity in their properties who are looking for ways to earn more residual income after they sell their multi-family buildings.
This is not uncommon, especially for properties that need a little work or whose sellers are in need of more income than they currently enjoy.
Investor B sets up an arrangement where the seller 'holds' the value of the 20% down payment as a 2nd mortgage and then makes scheduled payments to the seller for an agreed time frame and for an agreed rate of interest.
The 80% loan is still on the table and, together, this creative duo of loans adds up to 1005% financing.
To address my more skeptical readers, are these situations out there growing on trees? Maybe not, but they do exist and, if you value liquidity the way you should in the modern economy, then this type of opportunity will be more than just an ideal scenario.
It will become the standard by which you judge investment opportunities for real estate, including for multi-family properties.

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