Real Estate Investing Articles

Real estate investing has always been considered a safe investing plan. Unless you were a “sucker” looking to purchase swampland in Florida, real estate investing was considered a winning strategy because barring unusual events the equity of a home would generally increase. But, the current subprime mortgage crisis has seriously impacted the current real estate investing landscape. However, this impact may actually be good for some people.

Some may wonder if the subprime mortgage fiasco has had a massive negative effect on the real estate investment market. Well, it would be foolish to assume that all the bad publicity generated by the subprime mortgage crisis has had a ripple effect on real estate investing. The prices of houses have fallen dramatically and loans have proven harder to secure. However, this can be considered a blessing as opposed to a negative.

First, let’s get something straight right off the bat: people are still buying and selling real estate. Yes, the subprime mortgage crisis has had a dramatic impact but it has not had such an impact that it has ended real estate transactions all together. So, as long as the real estate market has not completely collapsed and buying/selling real estate has become a thing of the past, you can always find an avenue for earning income in real estate. Barring something along the lines of the Bolshevik Revolution where the government seizes all land you will still have real estate investment options available. Therein, lay the key here: real estate prices will invariably rise in the future. If you are able to weather the storm until it reverses course you will be able to come out of the depreciation problem the subprime mortgage crisis created.

Here is a fact: if you currently do not have a subprime mortgage, and do not have a property that is being foreclosed upon, then you are not feeling the brunt of the crisis. If the equity of you home has fallen because of the ripple effect of the crisis but it is still more than what you paid for it, then you still are ahead of the game. In fact, when the real estate market eventually makes a comeback you will probably regain some if not all of your lost equity. In fact, you may even discover your equity increasing again depending on how much time passes. Patience here is the true key to success.

Additionally, you could even use the current subprime mortgage crisis to your advantage in the sense that this is currently a buyer’s market. This can give you the option of buying real estate in short sales, foreclosures or through other avenues which would provide a cheaper acquisition price. If you are able to purchase these homes on fair fixed interest rates, and not with interest only mortgages, no down payment loans and other such nonsense, you probably will avoid a host of problems that the subprime crisis has yielded. In a way, you could even airlift an old worn out cliché and apply it to this situation: “one door closes and another door opens.”

A.M. Caro is a freelance writer from Southern California.

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Posted by RENVEST under mortgages & real estate investing | No Comments »

By simple definition, leverage is investing with borrowed money as a way to increase potential gains. This is one of the biggest benefits of real estate investing; using the equity in your property to acquire new property.

For example, let’s say you are the owner of a $100,000 duplex; your down payment was $20,000, your lender financed the remaining $80,000, and since you first bought it, you’ve repaid another $10,000 against the loan balance. Your equity in the property is now $30,000; you can apply for a home equity loan for $30,000, and (provided it’s approved for the full amount) you’ve got $30,000 to use for other property investments. You could, theoretically, use that $30,000 exponentially as down payment on other projects, which convert to equity as soon as the loan is closed, and so on.

That sounds like a great deal, doesn’t it? Well, it is, provided you can get a home equity line of credit for an amount that you can use as a down payment for the acquisition of another property. That will depend on your own creditworthiness (or lack of it) and how much equity you’ve actually got in the property – the higher the percentage of equity you own, relative to the loan amount and the property value, the more likely the lender will be to offer you an equity loan equal to your equity. After all, a bank is in business to make money and how they make it is through interest and fees. Home equity loans, as a general rule, have higher (and often variable) interest rates than standard mortgage loans, so even in a tight market they’ll still be willing to give you a home equity loan.

Let’s say your lender gives you your home equity loan, and you’ve got $30,000 just burning a hole in your pocket. You spot a great investment deal with your name on it, and put in an offer, which is accepted. You can use the entire $30,000 as a down payment, or split it evenly, and use it as down payments on two properties.

With ownership of several properties, hopefully all of them income generating, you can afford to pay the monthly principal and interest on your equity line(s) of credit using your rental stream, and any remainder will be your profit. Don’t forget, the interest you pay on your home equity line of credit is also tax deductible.

While it would seem that leveraging your home equity is an entirely win-win proposition, you should be aware that real estate values don’t always go up, and that your ability to leverage could suffer if the property or credit markets experience a downturn. Consequently, the value of some properties may decline after an appraisal by the lender. Let’s look at the two scenarios below, which show a property which increased in value over a 3–year period and another property that decreased in value over the same period, both scenarios assume the repaid equity is $10,000.

It’s clear from the above example that, in the case where the property value fell from $100,000 to $90,000, the home owner will not be able to borrow against the equity in the property. Recently, some lenders have begun recalculating the value of homes in their loan portfolio, flagging borrowers whose home equity line and mortgage debt are more than 80% to 90% of a property’s current value. For these homeowners, their equity line of credit is either frozen or reduced.

The moral is that you should use your leverage, but don’t overuse it. It’s essential that you save enough money during the “good times” so that you’re ready when the “bad times” roll around, as they inevitably will, to cover your property carrying costs and still grow your real estate investment portfolio.

Barb Zigah is a freelance writer covering real estate and business topics.

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Posted by Barb Zigah under mortgages | 2 Comments »