Time Horizon and Risk. Since real estate is not a liquid asset, the investment in real property tends to have a longer horizon than CDs, stocks, or bonds. Buying real estate in an economy showing the first signs of recovery from a significant decline is risky because of the possibility for a double-dip recession. However, an investment with a sufficiently long enough time horizon will mitigate the risk associated with investing in a recovering economy. The amount of risk that you are willing to take is directly related to the financing options which will fit your investment horizon best.
 

Cash Purchase Outright. Since real estate is such a large investment, a person with say $30k to invest has a few options. The first is to purchase a home for $25k with cash and to rent the property out. These lower rent homes pose unique and distinct challenges that require skill to handle appropriately. People have become very wealthy from purchasing inexpensive homes and renting them out. However, the wealth is built slowly over a long time. Purchasing homes outright and renting them to people can provide returns far beyond what would be considered good returns on other forms of investment (10%+). Investment in more affordable houses tends to provide stronger cash flows over the life of the investment with lower expected value when selling the home. Often, the properties that are available in this price range are foreclosures, which have become much more challenging to purchase recently.

Leveraged Purchase. If your appetite is for more expensive homes with higher rents, then you might look at investing in homes that would be more expensive than the amount of money you have to invest. In order to pay for this type of investment, the traditional method would be to get a loan for some percentage of the purchase price. Investment loans are available today but are difficult to qualify for. Generally, banks want to see about 20% down from buyers as well as strong financials and good credit. Additionally, banks don’t like to give loans to people who own multiple properties. Getting a loan for an investment property typically carries a higher interest rates than owner-occupied loans due to the increased risk of default. Leverage (a loan) allows investors to get higher returns on investment due to tax benefits of interest and depreciation of the home.

Form Investment Partnership. The other option available to people who want to invest in real estate is to partner with people who have similar interest. Partnering with like-minded individuals provides the opportunity to spread the risk of investment across multiple parties or properties while realizing the best returns available in the market through investment in opportunities that might otherwise be inaccessible to you alone. Partnering with people with similar interest has unique challenges which include finding people with similar interest, finding investments of mutual interest, and setting up the partnership with a sustainable model that equally divides the responsibilities and clearly defines the requirements of each person. The debt and equity mixture among the partners can vary for each partnership as well. The exposure to price decline is reduced by the number of people you have involved in the process. Depending on your investment goals and the resources you have at your disposal, finding an investment partner could be a good move.

If you are interested in investing in your own home or purchasing an investment property, contact Tim McCollum today or call 704-965-2535.