Making your wealth grow in real estate is not as simple as buying and flipping, even if the market your investing in is red hot. This is because there are certain strategies to go about which can help maximize the return on your investment.
This involves creative use of real estate financing and approaching it correctly. Strategic real estate financing helps:
Boost the return of your cash
Both in appreciation and the rental yield. The less you put down on a property, the higher the return on your cash if the property value goes up and you are positive cash flow. For example, if you put only $20k down on a $200k property and the value of that property goes up $20k, your equity has increased 100%. If you rent that property, if you cash flow $2k at the end of the year, your return is a 10% annual yield. In comparison, if you invested $100k and that same property increased $20k and cash flows $5k a year, the equity increase is only 20% with a rental yield of 5%. Of course this is important that you purchase a property with an expectation that it cash flows and has a strong potential to increase in value. That is where prudent investing is involved.
Leaves extra cash for renovation
Paying a loan is predictable: there is a set monthly installment plan and the rates don’t fluctuate much, if at all. Construction, on the other, can be highly unpredictable. Expensive surprises from foundation to plumbing issues are common and involve readily available cash to take care of the problem to proceed efficiently with the project. It is better to have cash on hand for construction/renovation than to have it tied up to the real estate.
The purpose of growing your real estate portfolio is to keep buying strong performing properties. Financing allows you to disperse your cash over several real estate investments and not just one. The appreciation increases by several properties than just one, as well as the diversification helps minimize the risk if one project goes south.
Financing is great for having a passive approach to real estate. If you are consistent with buying properties that cash flow and in a growing area, payments for the loan become a routine and after thought. After years of collecting rent and paying the mortgage, the cash flow grows and the loan amount gets reduced. Although you might not make much in the beginning, years down the line your investment will yield higher than stocks and bonds and you still only invested the down payment in the beginning.
Overall, financing plays an integral part of real estate investing. But you must understand that loans are still a liability, and the deals you are involved are the ones that will prove if financing helped or added headache. This is also why getting the best financing that is right for your deals is just as important as the deal itself. Reviewing various products amongst several lenders helps you decide how to best close on the financing part of the deal.