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How To Finance An Investment Property
By: Giuelith Date: October 11, 2018, 11:35 am
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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.
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