Pros and cons of using your own money when buying foreclosures

Financing plays a vital role in real estate investing, and this includes buying foreclosed homes. While it’s pretty much a mantra to “use other people’s money,” keep in mind that different investments will generally require a different strategy. A financing option that worked wonders in one real estate deal can easily fail in another. What follows is a quick look at some of the pros and cons of using your own money to purchase a foreclosed property.

Advantages of using your own money

One of the best reasons to use your own money to buy a foreclosed home is the rate and terms, there aren’t any. Since you’re using your own money, you don’t have to pay points, origination fees, or a host of other junk fees (which often add up to three to five percent). When shopping for a foreclosure, it’s important to take a close look at transaction costs. After all, what’s the point of buying a foreclosure at a great price only to have your profits eaten up by excessive loan charges?

Another good reason to use your own money to buy a foreclosed property is your ability to act quickly and without the approval of your lender or real estate partner. If you have your own money, you have full control and the ability to make deals that other investors who rely on conventional financing cannot.

If you have less than stellar credit, using your own money is probably the best option. With today’s strict loan requirements, it can be difficult to get a conventional loan. And unless you’re already rich, getting a hard money loan can be really expensive. Can you say 16, 18, 20 percent?

Cons of using your own money

Probably the number one reason you shouldn’t use your own money to invest in a foreclosure is that it may limit your ability to act on another investment opportunity. It is what smart investors call leverage. In a real estate market that is appreciating, the less money you put into the deal to acquire the property, the more profitable it will be. For example, let’s say you have $100k in the bank to invest and you buy a foreclosure valued at $130k for that $100k. You have used up your investment money. What if the next week you could have bought a foreclosure valued at $150k for $90k? You’re out of luck.

Another reason using your own money might be a bad idea is if you would run out of funds. For example, you suddenly need a new furnace in the dead of winter but you don’t have the $5k to do it. Or his tenant leaves the state and now has a vacant home on his hands. Or the city passes a new ordinance that requires you to pay a large amount of taxes for the new street and sewer. Don’t you ever know?

In conclusion, there is no one-size-fits-all solution. Obviously, an investor who wants to quickly rehabilitate a foreclosure and turn it around has different financial needs than an investor who wants to buy and rent it long-term. And, of course, there are tax consequences, so be sure to check with your tax advisor. It is essential that you do your research, analyze your options and choose the financing solution that solves your problems and makes your investment profitable.