Investment Property Financing: How You Can Make Money With It
Contrary to popular belief, real estate investments don’t necessarily require large amounts of cash up front. In fact, many real estate moguls have risen to the top through leverage or financing. Investment property financing is an excellent real estate technique and a norm among experienced investors. The reason is obvious: firstly, you lose significant profits if you don’t take advantage of your investment. Second, real estate involves some risk, and therefore you wouldn’t want to put every penny of yours on the line.
Real estate can be a lucrative endeavor if you make use of investment property financing. As an example, consider the following scenario:
Let’s say you buy a property for $100,000 that appreciates at a rate of 8 percent per year. If you rent out the property, you are likely to rack up a profit of about 16 percent per year. However, with investment property financing, this net gain could skyrocket to more than 100 percent. In general, real estate investors can have a property financed for up to 95 percent of its total purchase price.
How does investment property financing work?
Considering the above scenario, let’s assume that your rental income fully covers your property ownership expenses. Now, an 8 percent appreciation in the property would produce a profit of $8,000 per year. If you can get 95 percent financing, you would have to pay only 5 percent down, which is $5,000. Thus, you earn returns of $8,000 on an investment of $5,000, which is a staggering 160 percent return on your investment.
If you’re willing to go a little further and invest in 10 of those properties (with 95 percent financing on each), you could end up turning a profit of $80,000 per year. Therefore, investment property financing is always better than a cash deal. However, getting financing for more than 5 or 6 properties can be quite cumbersome. As an investor, you must be eloquent enough to present convincing arguments, and you must possess exceptional negotiation skills.
All things considered, if you have a lot of cash and are satisfied with negligible returns on your investment, you may not be looking at investment property financing. However, if you yearn to be a major player in real estate, and also want to test the waters first by not using much of your own funds, then investment property financing is the way to go.
Copyright © 2006 Joel Teo. All rights reserved. (You may republish this article in its entirety with the following author information with live links only.)