Many people would like to get into the world of real estate investing, but have many questions. While real estate can be a lucrative place to make money, history teaches us that it is also a place to go bankrupt. One of the most key questions that must be answered before entering into an investment property is, “how will I finance this property?”
Should I Finance At All?
Many people decide not to invest in real estate until they have considerable savings with which to do so. This leads them to question whether they should finance at all. While exposure to leverage can be dangerous, it is usually a necessary component to make real estate investing work. Real estate investing is keyed around appreciation and if an asset is appreciating, you would like to obtain it for as little cash as possible. If your property isn’t appreciating, then you have entered into a bad investment to begin with.
Almost all bold claims about making a fortune in the real estate market are predicated on the notion of “seller financing.” In this model, the person who sells you their property accepts a small or no down-payment and allows you to make your monthly payments to them. This of course would be a great bargain, but it is very rare in the real world. While some people may be looking for an investment opportunity when leaving their house, most would rather put their equity into a more secure vehicle than loaning money to a stranger.
If you want to run realistic, reproducible financing numbers, it is best to assume you will have to put 20% down on your property. Banking institutions are immediately leery of lending money to real estate investors, but at that rate, even if you default they will probably make their money back. While this won’t allow you to achieve the kind of ludicrous returns many “Investment Programs” claim, it will put you in a leveraged position to make gains in a positive real estate market without over-extending yourself. Managing risk is an important part of any investment strategy.
There are many more considerations when considering investing in real estate. Much care and consideration should be invested before deciding to purchase property. While real estate can be a valuable part of a diversified portfolio, it is not a “get rich quick” scheme and requires careful planning.