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investment property loan
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Real Estate Investment Loan - Two Critical Things to Consider
By Joel Teo
Have you ever wondered why some real estate investors fail to meet their
monthly bank instalments for their real estate or why their
once stellar real estate investment has gone sour? This article will cover two
critical external factors attributable to Real Estate Investment Loans that can
affect the viability of your Real Estate Investment.
1. Interest Rates One of the key advantages of Real Estate Investment over
other types of investing is the ready access of information available through
the traditional print media and the internet. If you do not know much about
macro-economics, the first basic bit of economics that you can learn relating to
your Real Estate Investment Loan, is the effect of an interest rate rise and
whether there is going to be a rise and why and when. A rising interest rate may
eat into your monthly cashflow and erode your earnings so it would be wise to
spend some time thinking about the effect of a change in the interest rate on
your current investment situation.
When choosing a Real Estate Investment Loan, you want to have an eye on
current interest rates, future interest rates and the penalty that you might
have to pay should you want to refinance your loan later to take advantage of a
subsequently lower interest rate. So an obvious thing to do is to get a fixed
interest rate, if you think that the interest rates are going to be higher in
the next few months. The way to analyze this is to spend some time reading the
business part of the newspapers to consider how monetary policy in the Federal
Reserve is going to be in the next few months. This explains why some financial
institutions and large property developers hire former Federal Reserve
executives to tap on their expertise in understanding Federal Reserve Policy.
Another related interest rate investment strategy pertaining to Real Estate
Investment Loans is to buy the property “subject to the existing mortgage” if
the mortgage was locked in at a lower interest rate than the prevailing market
rate. This particular strategy works well in a rising interest rate situation.
Remember that a slight percentage increase may translate into a large jump in
the amount of interest that you are paying so it would be wise to do your maths
and get a friend to double check it before you leap into a deal.
2. Rental Yields The most common indicator and thing that people would know
about rental yield if you ask them is the Return on Investment (ROI). This is
the annual rental as a percentage of the total cost of the property. So for
example if I had paid $100,000 for the property and I recoup $10,000 per annum,
my ROI would be 10%. Note that as a quick rule of thumb this also means that
(excluding interest), you would fully pay up your property in ten years if you
apply the full rental proceeds to servicing your real estate investment loan.
However, ROI is not the end all and be all of the analysis, another
consideration when analyzing Rental Yield is not only the current or past rental
yields but the future rental yields. Thus in order to do future projections, we
need to study the property cycle of the target country and examine economic
factors which may affect supply and demand of rental property in the area.
For example, let’s say that we deem a particular Real Estate Investment
viable this year for the purposes of cash flow and get a Real Estate Investment
Loan. But what the you might have not considered is that you bought the property
at a high in the property cycle and rental demand might go back to normal levels
thereafter, rendering your so called Real Estate Investment in negative cash
flow territory. So we can observe that you need to learn about the potential
downside of your investment and do your sums carefully before you embark on
getting your Real Estate Investment Loan.
In conclusion, having a good understanding of interest rates and rental
yields will enable you to profit from Real Estate Investment and as such it
would be imperative to learn all you can about these things in your target
market so as to maximize your profits and yields. Investing in property when
viewed in this light can be said to be a science and it sometimes is best to
treat it as such so as to remain detached when deciding on whether to enter into
a deal.
Copyright © 2006 Joel Teo. All rights reserved. (You may publish this article in its entirety with the following author's information with live links only.)
Joel Teo writes on various financial topics relating to Ahwatukee Real Estate Investment. Signup for his free online Real Estate Investing newsletter today and gain access to the “Six Day Real Estate Investment Profits Course” now at www.realestateinvestment101.info/Ahwatukee.html
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