Should You Take on Debt for Investing in Real Estate?
It is surely an undisputed fact that investing in real estate is supposed to be a great business model ideal for investors hoping to attain long-term financial success. The one issue most budding investors have is actually the fact that investing in real estate involves huge capital requirement. So many people are willing to borrow money for financing their real estate investment dreams. Is it okay to take on debts for investing in real estate deals?
One major misconception associated with real estate investors is supposed to be the assumption that real estate investors use cash for the majority of their investments as compared to using a borrowed amount or loan for financing real estate deals. However, in reality, nothing could be farther from the truth. Just in the same manner families purchase homes with a borrowed amount, investors do the same.
According to https://www.forbes.com, if you are thinking about generating some wealth for the years to come, the most shocking fact is that 42 percent of the Americans are having less than $10,000 kept aside for retirement. As inflation is consistently pulling down the value of the dollar and there is a rise in the actual cost of living, it is a good idea to consider building your own financial-security on a long-term basis. You must try to dominate the future and keep it under your firm control. During the last four years, a couple of surveys that took place three years apart revealed that a majority of the investors generally finance more than 50 percent of the total amount to be invested and just one of five investors, that is between 18.5 and 24 percent actually use cash.
The Advantage of Borrowing Money
It is quite a common practice to borrow money for investing in real estate. Borrowed money provides two main benefits. Firstly, you do not need to take out money from your own pocket and secondly, you no longer need to tie up huge amounts of your capital for your real estate deals. We know that even for a well-established real estate investor it could prove to be pretty difficult to tie up $100000 or even more in any property. Considering the numerous deals that successful real estate investors need to handle at a time, it seems that borrowing money to invest in the real estate deals is the right thing to do. Moreover, you must understand exactly what you are hoping to achieve with these investments. Some people aim to earn a lot of money so that they are able to quit their jobs. Your aspirations and objectives must be precise and clear in your mind so that you are sure about what you seem to be sacrificing for if the going gets hard. You may visit nationaldebtreliefprograms.com to learn more about perfect financial solutions.
Borrowed Money & the Risks Involved
It is true that when you are taking on a debt, it has its own risks. When you take out a loan for a real estate deal but if the deal turns out to be a flop or unprofitable, you would have to deal with repayment including interest despite the losses incurred. Moreover relying excessively on loans makes your business very much dependent on lenders and banks, preventing you from attaining financial autonomy, as far as, your business is concerned. According to https://www.investopedia.com relying on financial institutions such as banks to get a loan for your real estate business could be restricting your business instead of expanding it.
Should You Take a Loan for Your First Real Estate Deal?
It is always a good idea to purchase your first real estate property with your own money and accordingly carry on scaling your business by taking out loans later on. However, this advice is valid and applicable to only those people who have the required money to purchase the property outright. For others, borrowing is going to be very much a reality irrespective of the fact whether borrowing for the first deal is optimal or not. While borrowing money to raise the capital for your real estate deal, you must keep certain factors in mind to curb the risks. Firstly, initially, invest in a real estate property that is low in cost so that you could do with a limited borrowed sum. Try to identify a profitable deal because if you incur losses in your first deal, there is every chance you would go out of business. Last but not the least; you must borrow just about the amount you actually require. It would be an ideal situation if you could arrange your own money for funding a part of your real estate investment and then borrow the remaining sum you require to buy the property. This way, you could pay interest definitely, on a much smaller principal amount.
When Is Borrowing the Right Move?
Even though cash may look like a better option, there are certain situations wherein taking out a loan is preferable to investing your own money. For instance, you purchase a property for turning it into a rental property. Investing in a property for flipping means you would get your money back as soon as the property is sold off but it is not so in the case of a rental property. You would not be able to get back your money in the case of a rental property at least, for years after the property has been bought. It really makes very little sense to divert your own money and keep it blocked for years in a rental property. In this case, it is best to use a borrowed sum for acquiring the rental property and then rent out the property at such an amount that fetches a positive and profitable cash flow so that some income is generated and gradually equity is built in the house since it is being paid off.
Another circumstance when borrowing makes sense is when you are thinking of investing in a highly-priced property. It is quite obvious that higher-priced properties would be necessitating a relatively larger initial investment. However, you would be getting back higher returns. If you borrow at least, a portion of the total price of the property, it could be a wise move since it would help you go on expanding your already-established business into larger deals consistently.
Conclusion
Most of the real estate investors need to use borrowed amount for financing property deals to a certain extent. If you are using a borrowed sum for financing a property purchase, it is imperative to invest in a property that would surely turn a profit. Moreover, use the borrowed money cleverly for preventing substantial financial risk.
