2 Main Real Estate Finance and Investment Strategies
Real estate finance requires you to have a great strategy so that you can be able to achieve your goal. You may have decided you would like to start investing in property but you are not exactly sure how to go about it. One thing you should do before you begin is to research the financing options that may be available to you. Let us look at 2 main real estate finance and investment strategies which are very important.
When investors begin their endeavor with property investing, you find that financing is their only means of purchasing the property. The following are some tips regarding real estate financing and investment strategy that may be beneficial to you.
1. Use Leverage as the investment strategy
When you hear the term “leverage” applied to real estate financing and investment, you will find that this term simply means to use borrowed money for financing your property investment. Your initial investment will be the money that you use for a down payment.
In order for this leverage to be beneficial in your real estate finance and investment strategy, you will want to secure the borrowed money at a low-interest rate and make sure the term of the loan is over the longest period of time that is possible. This is to avoid yourself from being tied up in the property and having the least money for your own or another investment usage.
You do have to remember, however, that the risk of your investment is tied in directly with leverage. If you place a small down payment on the property, the leverage is high and the ratio of the amount owed to the value of the property is high, making the property a high risk. The more money you put as a down payment on the property, the lower the leverage and the lower the risk.
2. Using Pyramidal Strategy
Many, in their real estate financing and investment strategy, use pyramiding to acquire more properties. What this simply means is that you are using the equity on one property to help you purchase another.
Pyramiding through the sale is also another real estate finance and investment strategy used by many, as well. In this method, when your property’s value has increased, you sell instead of taking out a home equity loan.
For example, you purchase a property for $100,000 by making a down payment of $20,000 and borrowing $80,000. The property’s value at the time of the purchase is $110,000. Six months later, you have a positive cash flow of $1,000 a month on the property and its value has increased by $40,000 due to your renovations. You now have equity of approximately $70,000 or more in the property.
You take out a home equity loan of $30,000 and this is used for the down payment of another investment property. This is known as pyramiding and is a real estate finance and investment strategy used by many.
Before you begin investing in property, it is crucial to understand what real estate finance and investment strategy you plan to use. However, it is also important to understand that property investment comes with risk. Research the facts and figures before you make any decision with your real estate finance and investment strategy. Using the above two strategies will give you a great opportunity in achieving your investment goals.