For years people have been investing in real estate, building a healthy net worth, funding retirement and much more. One of the greatest features of real estate investment is that anyone can do it with the proper knowledge. When investing in real estate it's essential to know the type of investment you're interested in, the time period of that investment, risks associated with the investment and your financial situation (now and throughout the investment period).Low Cost Mortgages. Great Rates. Personal Service. No Hidden Fee. Approval in Minutes.
Types of Real Estate Investments
There are many types of real estate investments. For purposes of this article we'll focus on purchasing a property. In that respect there are investments that involve purchasing real estate for rental income and purchasing real estate for resale. Rental properties are less risk intensive because they return a cash flow during the investment period while also retaining (and most likely appreciating) their value. A real estate investment geared towards resale (suchas a flip) involves slightly more risk because of the speculation in value. Think of the real estate investment period like a stock or bond. A resale is more like a stock because its value is being speculated. Rental property, on the other hand, is closer to a bond because it pays back over time. Another thing to keep in mind is relationship between risk and reward. The higher the risk, the higher the potential reward. Buying a bond may be a little safer but stocks are better known quick returns (and large returns at that). The type of real estate investment you choose should coincide with the level of risk you are comfortable with.
Mortgage Payment Calculator: Figure out your estimated payment for different loan amounts, interest rates, and terms.
Real Estate Investment Period
We've already compared the two major types of real estate investments. When considering the amount of time to invest there are several factors to consider. Are you looking to invest aggressively in a short period of time (buy more properties to build an investment portfolio) or fund a life event (retirement, child's college education, etc.)? It's important to understand your reason for investing. This will help determine your level of risk and, in turn, dictate the type of investment and the length of the investment. For aggressive investors who are less worried about risk and want to establish a wealth building portfolio it's better to target a shorter investment horizon. This is because you can secure more favorable mortgage types (which will be discussed later). For investors saving for retirement or other life event, slow and steady wins the race. Target an investment period that coincides with the type of life you'd like to be living during the harvest period of your investment. For example, if you'd like to retire at 60 and you purchase your investment property at 40, your investment period is 20 years. Your investment and mortgage types will coincide with this.
E-LOAN ® Mortgage, Home Equity & Auto Loans. Great Rates. Approval in Minutes.
Know Your Financial Situation Before Investing in Real Estate
Regardless of your investment type or invesment period, you are going to want to have an impressive credit rating (low debt utilization ratio, no or few late payments, etc.) and an adequate income. With rental properties rental income is usually accepted for any unit you're not living in. Before purchasing a property check your credit score as well as lenders' requirements for top rates. Often, a couple points on your credit score can save on points in interest (resulting in thousands of dollars of savings over time). The amount you put down and the case reserves you have for maintennance and improvements will play a big role in your investment as well. With rental properties the ideal situation would be to put 20% as a down payment. This will help negotiate the best possible rates and eliminate the need for private mortgage insurance (resulting in huge savings over time). With resales the goal is to put down as little as possible. It's more important to retain cash for necessary improvements the increase the value of the property. Also, since the investment time period is short you're not planning on paying a lot in interest or private mortgage insurance anyways.
E-LOAN ® Easiest Online Lending Resource. Great Rates. No Hidden Fees.
Mortgage Types for Investing in Real Estate
Depending on the type of real estate investment you'd like to be involved with and the time period for investing, there are several mortgage types to consider. For an investment in rental real estate that has a long investment horizon you'll want to stick with traditional mortgage types or FHA insured mortgages. These include:
- 15 Year Fixed Rate Mortgages
- 30 Year Fixed Rate Mortgages
- Balloon Mortgages
- Graduated Payment Mortgages
- Buy Down Mortgages
Investments in resale real estate that have a shorter investment period are better suited for mortgages that require little to no down payments, have a low introductory interest rate and require that little to no principal be paid. This type of mortgage includes:
A good rule of thumb in determining the right type of mortgage for your investment is the longer the investment period (and least amount of risk) the more you want to pay upfront. The shorter the investment period (and more risk) the less you want to pay upfront.
Words of Caution for Real Estate Investments
As with any investment, know what you're getting into before you're into it. Research the market by comparing the prices of comparable houses that have sold in the area. This will give you a good idea if you are paying too much. The same will go for your mortgage. Know the terms and negotiate, negotiate, negotiate. Mortgage companies want your business (now and in the future). It doesn't hurt to request, or even demand, better rates or better repayment terms.
No comments:
Post a Comment