Real Estate - Real Estate Investment

For decades the way to finance a property purchase was 80-20, 20 percent down, 80 percent on loan. Certainly, there have been many who put more down, but 20 percent was considered the bare minimum. Happily, things have changed.

There are now a dozen or more ways to finance a property purchase, whether purely for real estate investing or for a primary residence. One common method is to have more than one loan, usually in the form of a second mortgage. The buyer puts 5 percent in, and effectively borrows the other 15 percent on a separate loan, usually at a much higher interest rate.

While it’s nice to invest less for the same property, the downside is not limited to the higher interest rate on the second mortgage loan. Since the buyer doesn’t meet the standard 20 percent minimum, lenders almost always require PMI (private mortgage insurance). Fees are usually hefty.

Though it’s theoretically possible to have the lender remove the PMI requirement after enough payments have been made it rarely happens. In theory, once the loan(s) have been paid down so that the LTV (loan-to-value ratio) is at 80 percent ? usually by a combination of paying down the second mortgage and appreciation of the value of the property ? the lender will be willing to consider removing the PMI cost from monthly payments. Most often, before that happens, the loan is refinanced or the property sold.

The ambitious can find other sources of financing. When considering property in a new development, such as a planned community or new housing tract, manufacturers will often be willing to fund a home loan for early buyers. Such loans are frequently available at only 5 percent of the purchase price.

For decades, when it came to real estate investing, the way to finance a property purchase was 80-20, 20 percent down, 80 percent on loan. Certainly, there have been many who put more down, but 20 percent was considered the bare minimum. Happily, things have changed.

There are now a dozen or more ways to finance a property purchase, whether for pure investment or primary residence. One common method is to have more than one loan, usually in the form of a second mortgage. The buyer puts 5 percent in, and effectively borrows the other 15 percent on a separate loan, usually at a much higher interest rate.

While it’s nice to invest less for the same property, the downside is not limited to the higher interest rate on the second mortgage loan. Since the buyer doesn’t meet the standard 20 percent minimum, lenders almost always require PMI (private mortgage insurance). Fees are usually hefty.

Though it’s theoretically possible to have the lender remove the PMI requirement after enough payments have been made it rarely happens. In theory, once the loan(s) have been paid down so that the LTV (loan-to-value ratio) is at 80 percent ? usually by a combination of paying down the second mortgage and appreciation of the value of the property ? the lender will be willing to consider removing the PMI cost from monthly payments. Most often, before that happens, the loan is refinanced or the property sold.

Buying a property for the first time, whether as a home or purely an investment, is exciting and risky ? and one because of the other. You read or hear about rapidly rising prices and think ‘I gotta get me some of that!’ Excellent idea ? if you keep in mind, too, that there are risks. Here are some suggestions about how to keep the excitement, profit from the opportunity, and minimize the risks.

Before investing in your first property, do some homework. You don’t have to get a PhD in Real Estate Investing, Finance, or Law, but you need to get a good chunk of information and think about your own situation realistically. Buying and selling real estate is not so simple as changing cars.

Familiarize yourself with the market you’re interested in and find out what the average property is going for. It can vary considerably even within a single housing tract. That information is easily gained by talking with local Realtors or looking on the Internet.

Study a little bit about legal restrictions and requirements, about contracts, escrow, titles, insurance, closing procedure, and the roles different individuals play in the process. Each has a cost. Shop around.

Once you’re ready to take the plunge the next step is to find a potentially profitable property. The Internet makes that a lot easier these days, but you need to drive around the area, too. Look for ‘For Sale By Owner’ signs and scour the local newspapers for ‘For Rent’, abandoned properties, etc. And talk with friends, family, and local Realtors.