Analyzing Loans for Real Estate Investing before you Take One

Analyzing Loans for Real Estate Investing before you Take One

It’s true that there’s no depreciation in properties.  However, there will be times that you’ll fail in your investments if you don’t analyze and factor all costs involved in your application of loans for real estate investing.

In real estate, it’s the market that dictates your profit.  When you sell a property, you cannot decide how much your markup should be – it is the price of your competition, interest rate, and a lot of other factors that will determine the selling price.

Types of Mortgage Loans

From the perspective of an investor, these are popular mortgage types:

•    Fixed Rate – predictable, with low risk, but do not always have the lowest rate.
•    Adjustable Rate (ARM) – may offer lower rates initially but you must assume the rise of the interest rate throughout the life of your investment.
•    Zero Down – no down payment but be aware of some risks.
•    Interest Only – pay interest only for a certain pre-defined period.
•    Balloon – amortized longer to save on monthly payments but be prepared to re-finance towards the end.

“Determining suitable loans for real estate investing is your key factor in analyzing the cash flow generated by your investment and your risk level,” says Chris Smith, an investor in real estate.

Things to Consider

To analyze your investment, you need to factor in costs such as property maintenance and taxes.  Unfortunately, some lending companies only give 80% of the property value so you have to prepare the remaining 20% down payment.

There’s also the debt ratio which basically compares the actual cost versus the expected income coming from your property.  If you get a 1.2 ratio, it means that your margin is 20% and your profit is 10% upon loan payment.

And when you’re taking out loans for real estate investing, you need to find out the amount of your total payment after factoring in all of the interest rates.  For example, you’re planning to get a loan of $100,000 payable in 30 years at an interest rate of 10%.

To make this easier, calculate it as “interest only payment.”  This means that you need to pay $10,000 a year.  So assuming that profit from your property rental is 16%, therefore, this is a good investment loan.  However, remember that most of the interest rates today are compounded, so you have to consider that too.

According to Michael D. Holt, senior author and editor of REAP (Real Estate Advice Professionals): “An integral factor to real estate investing success is doing proper research.  A true investor should be concerned with taking the appropriate investment property loan to make a beneficial purchase.”

Leave a Reply