Contrary to popular believe, real estate investments do not necessarily require loads of cash at the outset. In fact, many real estate tycoons have made their way to the top through leveraging or financing. Investment property financing is an excellent real estate technique, and a norm among seasoned investors. The reason is obvious ? Firstly, you lose on significant profits if you don't leverage your investment. Secondly, real estate does involve some risk and, hence, you wouldn't want to put each 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:
Say you purchase a property for $100,000 that appreciates at a rate of 8 percent per year. If you rent the property, you are likely to accrue a profit of around 16 percent per year. With investment property financing, however, this net profit could skyrocket to over 100 percent. In general, real estate investors can have a property financed for up to 95 percent of its total purchase price.
How investment property financing works?
Bearing in mind the above scenario, let's suppose that your rental income completely covers the expense of owning the property. Now, an 8 percent appreciation in property would yield a profit of $8,000 per year. If you are able to acquire 95 percent financing, you would have to pay only 5 percent as down payment, which is $5,000. Therefore, you bag returns of $8,000 on an investment of $5,000 ? that is an overwhelming 160 percent return on your investment.
If you are willing to go a bit further and invest in 10 such properties (with 95 percent financing on each), you could end up accruing a profit of $80,000 per year. Therefore, investment property financing is always better than an all-cash deal. However, attaining finance for more than 5 or 6 properties can be quite cumbersome. As an investor, you need to be articulate enough to put forth convincing arguments, and you must possess exceptional negotiation skills.
All in all, if you have bountiful of cash, and are content with trifling returns on your investment, then you may not look for investment property financing. However, if you crave to be a big gun in real estate, and you also want to test the waters first by not using much of your own funds, then investment property financing is the way to go.
