If you want to use debt to buy real estate you must know whether or not it is actually worth it. You will have to analyze several factors, understand different trends that are currently prevailing as well as those that are coming up and then determine the right approach to invest.
To start with, you must be confident about investing in real estate debt because most real estate investors still argue whether or not cash is the best way for making investment property financing. Few real estate investors think cash is the best way to make money while on the other hand there are several such investors who believe debt is far more superior and less risky.
Therefore, the first thing you should consider is the advantage of buying real estate with debt financing before you move on to how it works and the risks that it can bring to an investor.
Difference in debts
In order to have a comprehensive knowledge about real estate debt financing you must first understand the types of debts. This will make your decision making process far easier and more effective.
You may have heard a lot about good debt ad bad debt. Well, it is true that it is not at all good to be in debt but still if you can differentiate between debts, especially the good and the bad ones, you may be in a better position even while carrying a debt. This is because all debts are not bad after all. It all depend s on how well you use it.
If you are prudent enough then you will make the best use of your debt and make it more productive. Yes, debts can be productive and that is where debts are considered to be good. On the other hand, if you use debt just as you feel like, you will soon find yourself in an unmanageable situation looking for alternative sources like Nationaldebtreliefprograms.com and others for easy and faster relief from it.
Typically, in the finance sector there are three specific types of debts that care categorized according to your use. These are:
- Bad debt: These are those kinds of debts that you usually use to buy an item that will lose its value over time such as a personal loan or a car loan or even credit cards. Therefore, whenever it is possible you should buy items by paying for it in cash.
- Tolerable debt: The best example of tolerable debt is a home mortgage and it does not need any further explanation. This is a debt that may not make or create any money for you but at least it will give you a lot of peace and satisfaction knowing that you have protective roof over your head.
- Good debt: These are the good stuff that will help you to generate a regular income such as investing in a rental investment property. If you are a real estate investor and use your debts to buy real estate only you are actually leveraging good debt simply to increase your wealth in the form of real estate.
With good debts you can leverage your real estate investment. This you can do best in investing by using the borrowed equity or different financial instruments to purchase any new asset. This will enable you to increase its value and at the same time will help you to enhance the potential return on your investment.
Property mortgage method
However, when it comes to real estate investing, the easiest and simplest way of leverage your debt is by following the old school property mortgage method. In this process you actually use the debt to buy real estate.
- In simpler words, it is the process wherein you use the money borrowed from other persons to buy a property in your name that will increase your real estate wealth.
- It will at the same time produce a steady income if you invest in purchasing any income producing assets.
- This will create liquid wealth as well as the property is likely to appreciate in its worth thereby increasing the value of your real estate value as well.
There are different types of real estate debt instruments that you may consider according to your preference. Remember, real estate investment loans are not created equal and it is for this reason you must the different types of it especially if you are a beginner in real estate investing.
Different Types Of Real Estate Debt Instruments
It is a smart idea to know all different types of common mortgages to make a successful and productive investment in real estate. Such knowledge will help you to know your options and make the right choice.
- Fixed rate mortgages: Often called as FRMs, these types of mortgages are fully amortized. This means that you will pay a fixed rate of interest throughout the entire life of the loan. Therefore, as a real estate investor you will know the exact amount of money going out of your pocket. This will help you to estimate your cash flow from the investment property accurately.
- Adjustable rate mortgages: These are called the ARMs in which the rate of interest of the mortgage loan is adjusted periodically. This is based on the index that reflects the cost of the lender to borrow the money in a credit market. However, ARM financing of investment property is not recommended because you will not be able to estimate the total mortgage payments precisely as the interest rates may not be stable.
- Interest only mortgages: These are something that you should never accept from a mortgage lender. This is because you will only pay the interest portion of the loan within the predetermined tenure of the loan. As for the principal you will pay it on maturity with an exceptionally large balloon payment.
Unfortunately the mortgage lenders who are most of the times denoted as “predatory lenders” usually do not have any good intent and interest in their hearts to offer the borrowers mortgages with favorable conditions. Now they cannot do it to you.