As per Huffpost.com, real estate investing could be far more complicated as compared to investing in stocks due to the legal, financial, and various due diligence requirements necessary in this industry. According to some experienced real estate investors, using cash is the most effective way of making money in the business of real estate while there are yet others who feel that utilizing debt for buying real estate could have far more advantages. Let us examine how real estate debt financing works and specifically what benefits it brings to the real estate investor as such.
Related: Buying an Investment Property: Cash or Mortgage?
It may sound quite crazy to think about using debt for buying a real estate investment. However, it is supposed to be a growing trend that is gaining traction in the current real estate business scenario. Setting the record straight, you need to understand that taking debt for buying real estate is not something like for instance, maxing out your credit card for going on vacation. You will be taking out a loan specifically for your real estate investment. In this case, the cash flow should be covering the debt payment.
You Must Realize That Not All Debts Are Bound to Be Bad Debt
Even though it is not an ideal situation to be in debt, it is of critical importance to differentiate between diverse kinds of debt.
Bad Debt
Bad debt is supposed to be the type of debt used to purchase anything that will lose value such as with credit cards and personal loans. Even though it’s not always possible, it could be better to consider saving up and paying for such things with cash. Bad debt is supposed to be what you would be using on fulfilling your wants only and not your needs. For instance, buying a pair of designer sandals or an exclusive diamond ring! Bad debt always is accompanied by liability purchases like a vacation or car.
The kind of debt investment you must get involved in is specifically an income-generating asset. An asset could be defined as something that helps in fetching some cash for you. It does not wipe out any cash. Liabilities are not welcome. You must be interested in assets that generate more income. Bad debt would take place when you start investing in those things that tend to lose their value eventually over time. You simply cannot waste your money like that. That is why you need to devote your attention to assets that would be generating some income. They should be saving you enough money and opening up a lot of real estate investment opportunities for you. Seek expert advice for perfect solutions for all debt-related issues.
Tolerable Debt
A home mortgage seems to be an excellent instance of tolerable debt. This type of debt is not supposed to make any money for you but it would, at least, help in getting you a home.
Good Debt
Good debt is the type of debt that could be used for financing any rental investment property. If you wish to be a successful real estate investor, you must effectively utilize debt to purchase real estate; you just need to leverage good debt for boosting your real estate wealth. Money intelligent people are smart enough to utilize good debt for boosting their worth and wealth. They would be investing in real estate with positive cash flow utilizing other people’s money. By other people, we mean investors or banks.
Related: Equity vs. Debt in Real Estate Investing
Why Should You Use Debt to Purchase Real Estate?
To Get Access to Much Better Investments
Making money in the business of real estate is certainly not easy, particularly when you’re using your own money. That is the reason why several real estate investors are turning to debt for purchasing rental properties. If you do have $100,000 in hard cash, you could easily utilize that amount as your down payment for a more costly and valuable property with a much higher ROI. It is certainly not that simple at all times. Real estate investors must use effective cutting-edge investment property calculators while appraising an investment property’s ROI.
Check out Mashvisor’s Investment Property Calculator now.
To Boost Your Overall Return on Investment
Utilizing debt for financing your real estate investments would let you purchase multiple properties. Suppose you have $100,000, you surely could purchase four rental properties having a down payment of approximately $25,000 each. Now instead of devoting all your cash to one single real estate property, with the help of debt, you could get the opportunity for building your real estate portfolio and increasing your overall return on investment.
To Obtain a Tax Shield
Real estate investors could be deducting interest on the amount borrowed for buying rental properties. Remember this tax break is, actually, allowed just to motivate investment and encourage homeownership.
Tips for Utilizing Debt to Purchase Real Estate
Opt Towards Making a Substantial Down Payment
As a standard practice, the higher the amount of money you devote towards making the down payment, you are sure to obtain much-improved mortgage loan terms and conditions.
Focus on Being Creative
You must not be held back because of your poor credit score from accessing useful debt instruments for financing your rental property in the future. You may consider alternative financing choices such as getting money via HELOC or home equity line of credit or some hard money loans.
Related: A Guide to Creative Real Estate Investing
Tips to Use Debt for Financing Your Next Real Estate Property
Identify Your Precise Real Estate Investment Property
You must identify exactly what you are searching for in terms of your real estate investment property. For instance, one effective technique would be to utilize Mashvisor’s Property Finder for searching for a perfect real estate investment property. Using this tool, you can set your exact investment criteria and it will return a list of top-performing properties in the area of your choice.
Apply for the Loan Once You Find a Good Property
Once you locate the real estate investment property of your preference and the one that caters to your unique requirements, you could simply go ahead and put in your loan application.
Observe How Your Real Estate Investment Starts Growing
Once your investment starts to grow in terms of value or worth, the real estate equity from this particular real estate investment could be utilized for your upcoming investment. This should be saving you money and time.
Conclusion
Utilizing debt for buying real estate could prove to be immensely advantageous. If you are a budding real estate investor, you must do your homework meticulously and understand the options open to you for financing investment properties. Once you know where to invest your money to gain higher ROIs, you are sure to succeed in real estate investing.
This blog has been contributed by Marina Thomas.