Real estate as investment
Investment property financing is popular because real estate is generally a prime method of investing money. In comparison to other forms of investment, such as stock investment, real estate investment is low-risk and almost always leads to profit. The real estate market does fluctuate but homes generally rise in value over time. For a person willing to wait for a return on investment, real estate is an excellent way to go. Investment property financing recognizes the value placed on real estate investment and seeks to provide a means for such investment.
The rental home
A majority of the people looking in to investment property financing are looking to purchase a home which will be owned over a relatively long period of time and rented out to tenants. This is an investment in two forms. First, it provides a monthly income from acquired rent. If the terms of investment property financing are good, the rent will outweigh the costs of mortgage and the upkeep of the property and create monthly revenue. Second, the real estate will increase in value over time. When sold, the borrower will be able to fully repay the loan from investment property financing and make a profit.
Working with the institutions
Investment property financing is generally a part of the home buying process and will occur during the purchasing and closing of the home. Investment property financing requires negotiation of good terms. For many people, this will not be the first home bought, and so the borrower may have enough knowledge about investment property financing to work with lenders on his or her own.
Assistance from a mortgage broker can ease the process of working with the lending institutions. The mortgage broker can assist with finding the best investment property financing for the particular situation of the borrower. The mortgage broker will explain all of the terms and agreements of different forms of investment property financing and help the borrower to make the right decision as to which lender and which loan are right.
Choosing your investment
Beginning investors should start with a small project. For example, Justin has been involved in real estate for over ten years now, and has invested in many commercial and residential properties. He has found that the key to his investments are to purchase in a good location.
Justin started with a simple duplex, which he later refinanced to buy a four-plex. He painted and made a few changes to the four-plex, and sold it for a seven-plex. He also bought another four-plex. He renovated the units and made minor repairs and sold it for a decent return.
He found that fixer-uppers really work well if you live nearby and can do most of the work yourself. This cuts your expenses. Justin learned with each investment and learned to be conservative. Don't let the dollar signs rush you into anything.
Whether you are looking to buy a house, a duplex or an apartment complex, you need to carefully review the property's economics. Are the rents you plan to charge reasonable? Are your expenses correct? Can you live with the cost of the mortgage? What happens when a unit is empty? Do you still have enough income?
You may not want to be a landlord and prefer to buy a house, fix it and flip it. While you can make a lot of money if you are wise, there are still a lot of issues involved. You have to look at the neighborhood, the market and the budget you have for repairs. Do you have enough money to pay the mortgage if the property does not sell quickly? What if you have to go over budget on necessary repairs? What if things are uncovered that devalue the home? What will you do then?
Large cities tend to be better investment areas than small towns because there are more tenants and buyers. Communities on freeways are attractive as investments due to the access to metro areas. Vacation areas and towns are also fairly stable.
Exiting your investment
Things happen. The economy, interest rates, job opportunities and construction trend impact every real estate investor. You need to watch the trends and keep in touch with local brokers, appraisers, investors and real estate attorneys.
No matter what you are investing in, you need an exit strategy. You need to know when you will sell, if you will take money and pay taxes or complete an IRS 1031 tax deferred exchange. Does your plan include enough money for your retirement? Will you pay off the property or refinance it and use the proceeds to buy another investment? What if the value of the home drops?
A weak economy is something you should watch. You need to know if a depressed market will pull out of it or last. This tells you when to exit. If you can't find buyers when you are ready to sell, what will you do? Can you restructure your mortgage or have it assumed by a buyer. Check out what loan assumption costs are and if financing terms change with an assumption. You should research your financing options before you make any decisions, paying attention to more than just interest rates.
You need to think well into the future. Plan for the best and the worst. If you invest with a friend, what will happen if they need to pull out? Do you have enough money to handle emergencies or will you need to liquidate the real estate?
Your exit strategy is vital in making your decisions for the future. Plan with your goals in mind. The key is to take your time, pick the right property and live with what happens. In the worst case, the market goes away from where you expect and the value of the home goes down -- at least you can have the tenants pay for the mortgage |
