Real Estate Investing, the LIBORATED Way
By Paul Wylie, Founder, LIBORATED.COM^TM

April 3, 2009

Invest in real estate. To some, the statement is a call to action, a way for everyday, hardworking people to build wealth. To others, it’s an indictment of mental health, as in: “Invest in real estate? Are you crazy?” (I’m not fond of rhetorical questions—ask anyone who’s worked in a marketing department at one of my companies.) Lest I keep you in suspense, let me confirm that I belong to the first group. I believe in real estate investment as a wealth builder and a noble enterprise. It’s not for the reckless or the faint of heart. It’s also not for anyone who doesn’t pay attention to LIBOR and the many commercial and investment property loan programs tied to the index. There is no “secret” to real estate investing, but there are two rules: maintain positive cash flow and manage risk. LIBOR loans are an excellent means to follow these rules.

My three decades in finance and real estate began with my personal desire to be a real estate investor, which in turn grew out of another enterprise. Some friends and I had started a business, and I felt that owning a business meant owning everything about it, including the property where it stood. Fueled by youthful passions and 100% financing, I bought the property. As values rose in the 1980s, I went from being heavily mortgaged to having equity. There was only one thing to do: leverage that equity to buy more investment property. The right financing empowered my long-term plans to own real estate. My fascination with financing took me out of the original business and into the mortgage industry. That’s another story.
Fast forward to today. I continue to invest in real estate, and I still own the first property I purchased. I currently use a LIBOR-based mortgage strategy for two of my major real estate ventures:

• The ongoing rehabilitation and sale of residential properties
• Ownership of a multi-family property

To finance my rehab/resales, I have a short-term, multimillion dollar credit line with interest rates at a set margin above LIBOR. My monthly cost of funds has recently averaged 3.50%. With this LIBOR-based credit facility, I can control my expenses while I acquire, rehabilitate and resell the homes. In exchange for my current low rates, I risk two things:

• A prolonged sales cycle on a given property that would exceed the payoff date on funds borrowed from the credit line.
• A rising LIBOR which would increase my interest payments.

I accept these risks in order to reduce my costs of holding these properties and to boost my return on investment when I sell them. To deal with the above worst-case scenarios, I maintain what I perceive to be sufficient reserves to weather market changes that could slow the sale of my rehabbed homes and/or inflame LIBOR.
On the rental units I own, I have a multimillion dollar loan with interest rates tied to the 1-Month LIBOR. My monthly payment has averaged 3.25 % in recent months. The 1-Month LIBOR is typically a lower rate than other LIBOR indices such as the 3-Month, 6-Month and 1-Year LIBOR. The tradeoff: short-term rates such as the 1-Month LIBOR can be more volatile than other rates, meaning greater potential for interest spikes. The overriding advantage: while 1-Month LIBOR is low, the monthly net income from my units increases. In a worst-case scenario of sustained higher rates, I can refinance or modify my loan into a less expensive, intermediate fixed-rate mortgage with set rates for the first three to five years. When short-term rates jolt, rates based on indices with longer durations usually move more slowly, providing a time cushion to consider options without losing too much of a rate advantage with an alternate product. A final benefit of the LIBOR loan on my rental units: no prepayment penalty, allowing me to refinance at any time without incurring extra fees.

Invest in real estate? If you’re asking me sincerely and not just blurting out a rhetorical question, then my answer is yes. But I’ve spent far too long in the financial industry to not add some important caveats:

• Think cash flow at all times, whether it concerns purchasing and upgrading properties for resale or holding rental properties for income
• Create a mortgage strategy that anticipates good and bad scenarios while maximizing cash flow
• Build up reserves to cope with worst-case scenarios
  Consider LIBOR-based loans to facilitate all the above

Paul Wylie is a mortgage and real estate industry entrepreneur, consultant, and author with more than 25 years of experience. Paul founded Metrocities Mortgage in 1989, a “top 50” lender that grew from six employees and $125 million in annual loan production to 1400 employees and over $10 billion in loan production across the country by 2005.

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