- September 16, 2020
Some Mistakes to Avoid When Leveraging Real Estate
The opportunity to leverage in real estate and enhance your ROIs is one of the attractive aspects of investing in the property market. However, if you don’t leverage with care, the chances of becoming over-leveraged increase, putting you in financial adversity. But you can avoid that by mastering the following tips.
Never Count on Prevailing High Prices
It is a bad idea to leverage real estate based on the current high appreciation rate. Prices stick for long periods in the housing markets (think 10–25 years). Nonetheless, that is no guarantee that the same home value will continue to rise in the next three or five years. This concept may not be apparent to many, especially in this decade of unprecedented real estate appreciation. Simply because the market has been recording double-digit spikes in value each year over the past five years, does not mean that a property manager can expect the same trend the following year or years after. It is an alloyed concept because relying on current appreciation rate can make a landlord overpay for your target property. If the value doesn’t increase, it puts you in trouble. Worse still, you may find yourself making losses because of decreasing value.
Avoid Excessive Payments
A lot of people fail to understand the idea of what a bank can offer as a mortgage and what they can actually afford. For instance, your bank may offer you a loan, allowing you to purchase a $500,000 property with just a 20% down payment. What if you can’t afford the monthly payments? That shows it is beyond your monthly budget. High payments leave a limited margin for revenue, especially if property value stagnates. If you spend more than you can afford, you end up losing the investments and lowering your credit rating.
Poor Investment Decisions
As mentioned earlier, leverage is one thing that makes investing in real estate lucrative. Nonetheless, don’t let the allure drive you into making bad investments. Most lenders offer loans with incredibly low cash down, but that does not mean that you should buy. If you can spare some cash, throw it into the loan to get added equity on ownership. Sometimes that also means getting a lower mortgage rate and avoid additional charges like private mortgage insurance.
Leverage is tempting. It is like a double-edged sword. It can either mean success or failure in real estate investing. Taking advantage of leverage can make sense sometimes, but if done without proper research, it may expose you to scary levels of risk. It narrows down to your decision-making skills to make the best investments.
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Tips for Smart Usage of Leverage
When used strategically, leverage can be an excellent investment tool. Real estate investors need to always be on the lookout for the right market conditions. You also must set transaction thresholds and underplay any deals that fall short of your requirements.
According to the Forbes Real Estate Council, ask yourself questions like “How has property value fared in the community? What is the future regional and national economic outlook? What factors can potentially affect the appreciation rate in the future?” That could be the arrival or departure of a major source of employment in the area. Having questions to these answers will empower you to make rewarding investments.
Another practical, smart use of leverage is to develop a clear and solid investment strategy. Are you planning to make a short- or long-term investment? The answer to that question is critical. It enables one to outline the rules and regulations of when to ditch the investment or remain in play. You’ll already know your next action plan in case market trends change.
Finally, always listen to your gut. If your instincts signal to you that you are getting into a risky investment with little to no potential of returns, then forget about it. Real estate has its inherent risks, but you should set the limit of how much risk you can bear.
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