The secret in real estate business is to use other people’s money. This is how most real estate tycoons are made. Unlike traditional residential real estate mortgages, real estate financing offers much broader financial options, including lending or financing from various financial institutions. Transactions like these call for above-average negotiation skills.
It’s not advisable to invest your own money in a real estate as for a few very important reasons. First, you you tend to give most of your profits away by not leveraging your investment. Second, real estate is a very risky business – you don’t want to jeopardize everything you have.
This is not to say that real estate investment is all about losses. On the contrary. if you know how to make money work for you, you may actually garner a great deal of money in return for your investment.
Here’s how:
If, for example, you purchase a $100,000 property that increases an average of 7 percent per year (in reality that number could be higher or lower), you would see a net profit from renting your property resulting in an approximately 15 percent return.
If you’re content with little return of investment, you might settle with your 15 percent return. But if you really want to earn on your investment, consider the possibility of what leveraging can do for you. At present, a typical real estate investor can find financing as high as 95 to 97 percent of the purchase price. There even some instances where you may be able to get a 100 percent financing but we won’t use this for our example as it’s an inadequate comparison.
So, if you’re are an investor who is already content with a smallreturn of investment then 15 percent sounds like a lot. But for those who really want to make it big in the real estate, 15 percent is far from being considered a noteworthy return.
How does leveraging work?
Let’s assume that the rental income will cover all your expenses, including the mortgage payments. Taking the same example, a 7 percent appreciation of your property results in a $7,000 profit per year. With a 95% financing in place, you’ll be able to get a $7,000 return on $5,000 (your 5 percent down payment on a $100,000 real estate property). This will provide you with a 140 percent return on your investment. Not only that, with the same $100,000 you can go out and purchase 20 investment properties, finance 95% percent of them, and make an amazing $140,000 profit a year. This totally beats the $15,000 profit with an all-cash transaction.
In terms of the additional 20 properties, expect to have a hard time getting financing for them since usually only five or six new rental property mortgages are the maximum that lenders presently allow. Which is why you need to have an above-average negotiation skills.
By: Stu Pearson
Posts Tagged Mortgage Payments
The difference between a home loan and a home equity loan lies mainly in that the home equity loan, also known as a second or even third mortgage, is issued at a higher interest rate. This interest rate is lower than you could expect to pay on a credit card, but it will be still higher than the original interest rate.
Use a home equity mortgage calculator to see what releasing different percentages of your equity makes to the payments required. The mortgage calculator then allows you to compare whether this is the best course of action open to you.
The alternative which may be more attractive financially is refinancing your home completely. This is where the mortgage calculator can really work for you. There are a number of options when refinancing, especially if you have a substantial amount of equity in the home. By inputting these, one at a time, into a mortgage calculator you can create a list which will allow you to clearly see which option benefits you best.
Home equity loans often seem far more attractive to the home owner than they actually are. This is because the lender is hoping to seduce you into signing your property into his hands. Find out all the details and use your mortgage calculator. See if what you calculates matches what they want you to sign for. Later you may find that it wasn’t such a good idea as your home suddenly becomes under threat of foreclosure because of some contractual obligation that you hadn’t fully understood.
Only in extreme circumstances should you even consider a home equity loan that completely strips your property of any value over mortgage total. Keep your payments affordable by using the mortgage calculator and always factor in an additional percent or two on the interest rate.
Refinancing your home is a major step, but as with a first mortgage this is the only claim on your property. If you take out a home equity loan instead, then you will have an additional lender who has a financial stake in your home. If you decide that you much prefer the terms on the home equity loan, and the mortgage calculator seems to bring it well within your budget, then make sure you read the small print carefully.
You need to know what the payments are for: are they just interest which will leave a large capital balance payable at a later date, for example? Make sure you can afford these additional monthly payments.
Here are a few don’ts that will help you in the long run:
* Don’t lie to yourself or your mortgage calculator.
* Don’t over-estimate your income under any circumstances; treat overtime money as “extra” if possible, and not part of your usual salary.
*Don’t over-estimate the equity in your home in the mortgage calculator. This can lead to false hopes which your property appraiser will quickly dispel.
If you are hoping to use the released capital to make home improvements, these should add value to your property. Look into this carefully to find out approximately how much you’ll be increasing your property’s value before committing to either the loan or having the work carried out. Failure to carry out the work means you are still responsible for the loan, but that you have not created any new equity.
By: Gerald Mason
As a homeowner, there will always come a time when your property needs some significant work. This could be a few years after the house was built or as soon as you buy the property from a previous owner. Your main concern is bound to be how you are going to finance the work.
There are options available to finance your home repairs that mean you won’t have to make too many sacrifices in your lifestyle and personal expenses. You could look at taking out a mortgage if you own your home outright, or if you already have mortgage arrangement, you could look into a home equity loan.
If you decide to take out a mortgage, you can choose between a fixed or variable interest rate. The first is less risky as the interest rate will remain the same for the entire life of the loan. However, if interest rates are particularly high when you take out your mortgage and are likely to decrease, you might want to consider a flexible rate, which will change with shifts in the overall economy.
Think carefully about how long you are likely to remain in the property to determine the amount and loan period. If you can take a larger sum than you require for your home improvements, you can invest some for potential later repairs or improvements. Whatever mortgage you choose, your initial payments will be mainly interest, with the proportion of capital increasing as time passes. You can choose only to pay interest in the first year or two to reduce your initial outgoings.
A home equity loan will be based on the amount of capital you actually have in your home. This can be seen as the value of your home minus the capital amount you still owe on your mortgage. A lender will also look at your credit history and status. If you have sufficient equity in your home, and good credit, it should be simple to apply for a home equity loan. Interest rates are low as lenders are taking very little risk, and they believe that the home improvements the loan is financing will add to the value of the property.
You should shop around and get a number of quotes to compare when you are taking out a mortgage or home equity loan. Remember to include your regular bank, as being an existing customer can have advantages and qualify you for rates and offers you will not get with a new provider.
Although some home repair projects are unavoidable, many home improvements are not entirely essential. You should always balance how much you will be spending on a project including the interest on the loan, with the benefit you will get in terms of increased property value and quality of life. A loan may seem a large commitment, but if the home improvement project will add greatly to the value of your property the long term investment may be worth it.
By: Clinton N. Maxwell