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Corporate Finance And Investment
Jupita Fanklin
The secret in real estate business is to use other people’s
money. This is how most real estate tycoons are made. Unlike
traditional residential real estate mortgages, real estate
financing offers much broader financial options, including
lending or financing from various financial institutions.
Transactions like these call for above-average negotiation
skills.
It's not advisable to invest your own money in a real estate as
for a few very important reasons. First, you you tend to give
most of your profits away by not leveraging your investment.
Second, real estate is a very risky business – you don't want
to jeopardize everything you have.
This is not to say that real estate investment is all about
losses. On the contrary. if you know how to make money work
for you, you may actually garner a great deal of money in
return for your investment.
Here’s how:
If, for example, you purchase a $100,000 property that
increases an average of 7 percent per year (in reality that
number could be higher or lower), you would see a net profit
from renting your property resulting in an approximately 15
percent return.
If you're content with little return of investment, you might
settle with your 15 percent return. But if you really want to
earn on your investment, consider the possibility of what
leveraging can do for you. At present, a typical real estate
investor can find financing as high as 95 to 97 percent of
the purchase price. There even some instances where you may
be able to get a 100 percent financing but we won't use this
for our example as it's an inadequate comparison.
So, if you're are an investor who is already content with a
smallreturn of investment then 15 percent sounds like a lot.
But for those who really want to make it big in the real
estate, 15 percent is far from being considered a noteworthy
return.
How does leveraging work?
Let's assume that the rental income will cover all your
expenses, including the mortgage payments. Taking the same
example, a 7 percent appreciation of your property results
in a $7,000 profit per year. With a 95% financing in place,
you'll be able to get a $7,000 return on $5,000 (your 5
percent down payment on a $100,000 real estate property).
This will provide you with a 140 percent return on your
investment. Not only that, with the same $100,000 you can
go out and purchase 20 investment properties, finance 95%
percent of them, and make an amazing $140,000 profit a year.
This totally beats the $15,000 profit with an all-cash
transaction.
In terms of the additional 20 properties, expect to have a
hard time getting financing for them since usually only five
or six new rental property mortgages are the maximum that
lenders presently allow. Which is why you need to have an
above-average negotiation skills.
Article written By Stu Pearson.
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