Investing in real estate is as advantageous and as attractive as investing in the stock market. I would say it has three times more prospects of making money than any other business. But, since the market forces equally guide it; you cannot undermine the real estate’s constant risks. Let me begin discussing with you the advantages of real estate investments. I found the advantages as most suited and really practical.
Real Estate Investments are Less Risky
As compared to other investments, less misadventure is involved in a real estate property. I will not get away from the fact that you have the risk of losing it, just like any investment you make. Real estate investments are traditionally considered a stable and rich gainer, provided if one takes it seriously and full sagacity. The reasons for the real estate investments becoming less risky relate to various socio-economic factors, location, market behavior, the population density of an area; mortgage interest rate stability; good history of land appreciation, less inflation, and many more. As a rule of thumb, if you have a geographical area where there are plenty of resources available and low stable mortgage rates, you have a good reason for investing in such a region’s real estate market. On the contrary, if you have the condo in a place, which is burgeoning under the high inflation, it is far-fetched to even think of investing in its real estate market.
No Need for Huge Starting Capital
A real estate property in Canada can be procured for an initial amount as low as $8,000 to $ 15,000, and the remaining amount can be taken on holding the property as security. This is what you call High Ratio Financing. If you don’t have an idea about how it works, then let me explain to you with the help of an example. Remember that saying… Examples are better than percepts!
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If you buy a condo worth $200,000, you have to pay the initial capital amount, say 10% of $200,000. The remaining amount (which is 90%) can be financed against your condo. It means that in a High Ratio financing, the ratio between the debt (here in the example, it is 90% Mortgage) and the equity (here in the example, it is 10% down payment) is very high. It is also important to calculate high ratio mortgage insurance with Canada Mortgage and Housing Corporation (CMHC). If needed, you can also purchase the condo at a 100% mortgage price.
Honing Investment Skills
A real estate investment will be a pleasurable learning experience, especially when you buy a condo for yourself. It allows you to learn, and when I went ahead with my first real estate property, I was totally a dump man. Ask me now, and I can tell you everything, from A to Z. Necessity is the mother of all inventions. I had the necessity to buy the property, so I tried with it, and I was successful. I acquired all the knowledge and skills through experience in selling and purchasing residential property. Thanks to my job. It gave me the experience to become an investor.
Not a time taking Adventure
Real estate investment will not take out all your energies until you are prepared and foresighted to take the adventure in full swing. You can save a hell of a lot of time if you are vigilant enough to know the techniques of making a judicious investment at the right time and when good market conditions are prevailing then.
You should be prepared to time yourself. Take some time out, and do market research. Initiate small adventures that involve negotiating real estate deals, buying a property, managing it, and then selling it off. Calculate the time invested in your real estate negotiation. If the time was less than the optimum time, you have done it right. And if you invest more time, you need to work it out again and make some real correction for consummating the next deals. You have various ways and methodologies, called the Real Estate Strategies, that can make it happen for you in the right manner.
Leverage is the Right Way
The concept of leverage in real estate is not a new one. It implies investing a part of your money and borrowing the rest from other sources, like banks, investment companies, finance companies, or other people’s money (OPM). There have been many instances where people have become rich by practically applying OPM Leverage Principal. As I had discussed under the subhead – No Need for Huge Starting Capital, the high ratio financing scheme gives no risk to the lenders, as the property becomes the security. Moreover, if the lender is interested in selling the property, the net proceeds resulting from the sale of the property should comfortably cover the mortgage amount.
Now consider a situation where the lender leverages the property at too high ratio debt, say 98% or even more. Suddenly, the market shows a down turn, then both the investor and the lender. Hence, the greater the mortgage debt, the more the lender’s risk, and the lender must pay higher interest rates. The only way out to ease the risk from the lender’s head is to get the mortgage insured. Two companies authorized to insure your high-ratio mortgage debts are CMHC (www.cmhc-schl.gc.ca) and GE mortgage Insurance Canada (gemortgage.ca).
Let me explain to you with the help of an example… supposing you are buying a real estate property worth $ 200,000 at three mortgages, with the first one of $100,000, the second of $75,000, and the third one of $25,000. The possible percentage of interest rates charged can be 3%, 5%, and 7%. The last mortgage amount of $25,000 will be accounted, as riskiest, as it would relatively be the last mortgage that you will pay when you finally make a selling deal.