If you are serious about maximizing your profits and reducing your risks from investment in real estate, you need to carefully consider where your funding will come from. Are you in the market seeking a loan or are you looking for equity? The answer to this question will depend on your needs and the nature of your project. This article will inform you of three sources of loan financing which you may not have considered previously.
A few years ago when I was about to purchase a residential lot to do a flip, a friend with money on a fixed deposit offered to loan me the money I needed. He wanted repayment in full, plus 12% interest per annum, when the land was resold. Since I would have made approximately 40% profit on the deal, a repayment of 12% interest would have been very attractive to both of us. I didn’t take up the offer then, because I used the proceeds from another sale as part of the investment.
This illustration is to make the point that friends, family members or even strangers can be reliable sources of loans to finance building renovations and flips of small residential or commercial properties. Six months to a year, should be all the time you need for repayment. Agree to repay the loan with interest at the expiration of the agreed period rather than repay in monthly installments. Always hire the services of a lawyer to draw up a loan agreement. When necessary, offer collateral in the form of a Certificate of Title so your lender is assured that his or her money is secured.
A vendor’s mortgage is an arrangement whereby the seller (vendor) provides some or all of the mortgage financing on the property. Ask the vendor if he or she is willing to carry mortgage financing. Not every vendor will agree. But you never know until you ask. This arrangement can be advantageous to you if you plan to renovate, and, or resell the property in three to five years. You pay a deposit, monthly installments and a balloon payment at the end of the loan period. The vendor retains the Certificate of Title to the property just as the bank would.
Some time ago, one of my vendors provided a second mortgage on a property to an overseas-resident couple to top up the amount the Jamaican bank was lending them at the time. Since the repayment was made in US dollars, the interest rate on the loan was 10% at the time when the Jamaican banks were demanding 19% on mortgages. The loan was repaid in three years. The seller received additional revenue from the interest payment and secured a sale in a market that was otherwise dormant. The idea of vendor’s mortgage is slowly catching on in Jamaica, but it will become more popular as sellers and buyers get creative with their investment options.
If you are considering borrowing from a financial institution, you may be better off using the services of a mortgage broker to prepare your investment portfolio and search for a better deal than if you walked in the bank yourself. Select a broker who has extensive contacts in the banking industry and who is versed with the terms and biases of different banks. In addition, he or she must have experience putting together property investment proposals on a regular basis. Your geographic location should not be a hindrance to the eligibility of a loan.
Recently one of my neighbours was seeking financing to purchase a plaza in Portmore, St. Catherine. She made contact with a mortgage broker in Kingston. He presented her proposal to a Credit Union Manager in Port Antonio. The manager offered an attractive financing package because one of his clients was interested in privately putting up the money through the Credit Union.
As a borrower, whatever the source of your loan, remember to ensure that the terms — interest rate, maturity date, monthly payment, and penalty — are factors that will make an impact on the viability of your project.
About the Author
Sydney Davis is the Managing Director of Sydney Davis and Associates. He is a member of the Realtors Association of Jamaica and licensed by the Real Estate Board of Jamaica as a dealer, and property manager. His office is located at 80 Constant Spring Road, Kingston 10, Jamaica.