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4 Reminders To Highly Leverage Real Estate Buyers
With high leverage, a winning real estate investment can make Bitcoins look like child’s play. But the issue of risks is always something on the mind of those who are against borrowing to the heavens. With excessive leverage, the prospect of financial catastrophe over events out of your control can be scary indeed.
The irony is that when people with an eye on investments see a window of opportunity through easy credit, it can be a huge challenge to convince them to restrain themselves. Businessmen with a knack of making returns can be especially hard to convince. They have proven themselves through their business dealings and are often confident enough to make bold moves in an effort to increase their wealth through investing and asset acquisitions. Here are just 4 reminders for highly geared investors.
Don’t blindly depend on high appreciation
If real estate values have appreciated by 20% over the last 2 years before you made a purchase, your decision could be based on similar levels of value bursts. If you are really counting on that, you could be disappointed as high value rises can seldom be sustained. There are many reasons why real estate demand and supply go up and down. The good part is that you can often predict this with a certain amount of accuracy as it takes time for the forces to take effect in this industry.
There are many factors that can affect values. Global economic meltdowns can affect you when international investors pull their money out of the country, the potential of international conflict blowing in war can cause the market to lose confidence and put hot money into other investments, even governments under pressure from the public to keep prices in check can erect legislation and policies that you could never have thought of to control demand. It really is a jungle out there where you have to look out for yourself.
Overpaying because of easy credit
Sellers will always want to sell their properties at as high a price as possible. The market value of a house can be fair, but for putting a house on the market, a seller could be looking at a considerable amount of goodwill. In a tight credit market, an expensive house can seem like an impossible dream. But when credit loosens, you could find yourself sitting on a potential cash mountain to buy that dream house. This is when many people can lose their sense of value and take the plunge. Just because there is very little capital outlay does not make it a good buy where your returns explode like a fireworks celebration.
When a house is overprices, you could be looking at little to no appreciation. Maybe even depreciation is the real prospect. If value indeed starts to fall due to market correction, you could be looking at losses if your intention was to sell in the near future. Even worst, you could start receiving calls from the bank informing you of possible top ups that you cannot afford.
Be wary of high monthly mortgage payments
The problem with zero down or minimum down creative financing transactions is that it leaves buyers with very high monthly instalments to service. When your income is just enough to cover your life necessities and your payments, an income loss or a decrease can put you into turmoil. These days with mass job cuts being a common place, it is really tough to say for sure how secure your job is.
Even if you are able to keep up with all these payments comfortably, the pay raise that you predicted may or may not realise itself. And when the budget you have worked on takes into account the whole household instead of just yours, a household member’s loss of income can affect your whole investment. You could then have to convince relatives to give you a loan to tide things over. Is this really what you call an investment?
Remember it is all about cash flow
Even if you are a value player, you can still be in a comfortable position when depreciation occurs if you have a strong healthy cash flow. This means that rental is enough to pay off all expenses including the mortgage. If you are a regular home owner, you will also have nothing to worry about as long as you have a primary or secondary income that pays off the expenses. Cash flow really is king when it comes to properties.
This means that you should not rest on your laurels and relax. A simple error in your calculations can set you back considerable especially when this is a rental property we are talking about. You do not have to keep a big cash buffer in your account as long as there is more money coming in than going out. But let’s not forget that a month of vacancy can potentially set you back a few months worth of profits. These tedious calculations can sometimes be too much of a hassle for buyers to take seriously. You will only realise it’s significance when you run into trouble. That is what you want to avoid at all cost.