www.akerahomes.com
mfrentz@akerahomes.com
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What's the advantage?
When you have a property you have owned for any length of time and want to invest in a new property real estate is unique in that you can refinance your initial property and use that cash to reinvest in other properties. The greatest beauty of this strategy is that if done properly you are not putting your original investment at risk and you can now realize the multidimensional nature of real estate with twice the number of properties.
The higher the percentage of equity in a property, the less you are capitalizing on the many profit centres of real estate. Here's an example: If you own 100% of your property, nobody else is paying off your debt for you which means you aren't capitalizing on the full benefit of hedging against inflation. If you own 50% of your real estate then you are paying back your debt with deflated dollars! Remember my earlier blogs on this topic.
Another example is not realizing leveraged appreciation. When you own 100% of your property and it increases in value by 5%, you gain 5%. If you have only 50% equity in your property and it appreciates at 5% you are actually gaining a 10% return. Again, refer to my earlier blog on this topic for a fuller explanation.
Is there a rule of thumb?
It is important to understand how mortgages work. Should I remortgage or take out a HELOC? There are advantages of both. Two advantages of a HELOC are that I haven't messed around with how my cash flow is working on my investment and I can choose to make interest only payments which decrease the cost of this debt. Two advantages of mortgages are that the bank cannot ever call in my loan as long as I'm making payments and I am paying down principle each and every month rather than potentially leaving outstanding debt stagnant and not getting ahead in another way. You will need to make the decision yourself and I advise you to talk to professionals who you trust when making this decision; both mortgage brokers and other, more experienced, investors are wonderful to bump ideas off of, but make sure these people are competent in their field because it does not take very much time, effort, or money to legitimately claim I am either a mortgage broker or investor.
A note of caution:
I do not recommend anyone but the most experienced of investors to ever take out the maximum amount of equity from properties. You can put your entire portfolio at risk if you are over-leveraging. Remember my earlier blogs on this topic! Cash flow is king and must remain intact in order to manage that largest swaths of risk. Everyone has their own rule of thumb with this, but here is are two questions I ask myself every time I make a decision on refinancing or purchasing another property: What is the worst case scenario? Can I handle this scenario without putting my portfolio at risk? If I can handle it, then it poses far less risk to me. With a first property/investment you may not want to take a ton of equity out but with your 10th or 100th property you have much more to fall back on if something goes wrong. Also, I tend to like keeping a lot of equity in the home my family is currently living in. That way if everything else goes wrong my family isn't affected in the same way. I can lose my entire portfolio and not endanger my family.
Summary
If you are not at least thinking about reinvesting equity in your property you are not taking advantage of all that real estate can offer. The beauty of reinvesting is that you can have a full time job that takes care of your family while reinvesting all money made from real estate investing back into real estate investing. There is a snowball effect to reinvesting which can explode after a couple of decades! Remember the only financial lesson the majority of us learned in school? Compounding interest is almost magical in how it works to an investors advantage. I will leave the final word in today's post with someone who has significantly more pull to his quotes than myself. I've heard it said, though I question whether it was stated in these words, that Einstein stated: "The most powerful force in the universe is compounding interest". As far as I know, a less disputed statement by Einstein is: "Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it."
Here's to your future of risk-averse investing!
If
you would like to learn more about investing in real estate please
contact me at the email address listed at the beginning of this article
or go to my website at: www.akerahomes.com/investing-in-real-estate.html
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