Equity Real Estate Investing
Equity real estate investing gets exciting when you start using other people’s money to make money. One important thing to learn about is investment property financing and how to leverage.
What is Leverage in Equity Real Estate?
Regarding equity real estate, Leverage involves borrowing money to fund a real estate investment venture. The term leverage indicates that you are using borrowed money to increase your ability to buy more investment properties. The more you leverage, the higher your potential ROI, meaning you can make more money.
Leveraged equity real estate investing is most effective when rents and property values are on the rise. As rents climb and real estate values rise, mortgage payments for rental properties remain the same, increasing cash flow and profit.
The great news is that real estate has appreciated dramatically in many areas of the country. Rents have also increased, setting ideal conditions for real estate investors who understand how to use Leverage to build their portfolio of real estate investments using borrowed money.
How Is Leverage Calculated in Equity Real Estate Investing?
Calculating Leverage for rental properties is straightforward. All you do is divide your investment property’s value versus any debt or loans secured against the property, known as loan-to-value ratio, or LTV.
Why Use Leverage in Real Estate Investing?
The simple answer is to increase the potential to make more profit on your investments. Let’s look at a few scenarios. In our example, let’s say you have $100,000 to invest. You have a few options on how to use that money.
- 0% leverage would mean you buy a $100,000 investment property with your cash.
- 50% leverage means you buy a $200,000 investment property with half the money, and you secure financing for the rest.
- 75% leverage means you can buy a $400,000 property with $100,000 of your cash, and you borrow $300,000.
So, which one looks most appealing?
Let’s look at how much you can make; assuming property values increase 7% per year.
0% leverage, your investment property value is now $107,000, your net gain is $7,000.
50% leverage, your investment property value is now $214,000, giving you a net gain of $14,000.
If you choose option 3, your investment property value is now $428,000, a net gain of $28,000.
See the pattern and the benefit? If you can use Leverage, you can purchase higher valued properties as investments, which will increase your net gain potential when property values rise.
Equity Real Estate Financing
Ok, now we need to discuss investment property financing. Knowing how to secure investment property financing can provide enough Leverage to maximize your investment potential. Here are some ideas for how to finance an investment property.
Non-Owner Occupied Mortgage
The most common financing method is a mortgage against the investment property. These loans are harder and harder to get as you buy more investment properties. They typically require a minimum 20% down payment because mortgage insurance is not available to secure the debt above an 80% LTV.
If you go this route, you’ll need to document that you have at least two years of property management experience.
HomePath investment property financing is very selective and only works with a small number of Fannie Mae-owned properties sold at auction.
HomePath loans require a 5% down payment and don’t require mortgage insurance. The program allows for financing of up to 20 properties, where standard investment property loans stop at 4.
Home Equity Line of Credit
Investors often use HELOC on their current home to fund an investment property. These loans are prevalent, and many investors get their start using a secured credit line for a down payment. A HELOC is a Home Equity Line Of Credit secured by the equity in their home. Interest rates will be lower, making them affordable and a great way to get your start in leveraged equity real estate investing.
Use a Private Lender
The use of a Private Lender is what separates seasoned investors from amateurs. Why say that because an experienced real estate investor knows when and how to use each different type of lending instrument.
There are two key indicators to know when to use a private lender. The first is that you just got turned down for a loan. There is no money in a no! You will not be much of an investor if you give up when the banks say no.
The second thing that should make you call a private lender is when the deal needs to happen fast. A private lender, like Abbey Mortgage, can get your deal done very fast. When you need money to jump on an investment deal, you need to act quickly. Banks can take months, whereas a private lender can take as little as 5 to 10 days.
What else is there?
- Cashflow – Cashflow is vital, especially when you rely on it to cover living expenses as a full-time investor.
- Taxes – Real estate interest is typically the most significant deductible expense. Make sure you understand the tax implications by consulting your tax professional before and as you invest.
- Investment Objectives – As we progress in our investment career, our objectives can change. As an example, if you plan to retire, you may want to pay down your debt. Understand where you are in life; it is the most crucial part of investing.
Money is cheap right now, but you still need to know where to get it and how best to use it. We hope this article helped you understand that the more you use Leverage, the higher your potential for a large return on your money.