Have you ever wondered why some real estate investors fail to meet their monthly bank instalments for their real estate investment loans or why their once stellar real estate investment has gone sour? This article will cover two critical external factors attributable to Real Estate Investment Loans that can affect the viability of your Real Estate Investment.
1. Interest Rates
One of the key advantages of Real Estate Investment over other types of investing is the ready access of information available through the traditional print media and the internet. If you do not know much about macro-economics, the first basic bit of economics that you can learn relating to your Real Estate Investment Loan, is the effect of an interest rate rise and whether there is going to be a rise and why and when. A rising interest rate may eat into your monthly cashflow and erode your earnings so it would be wise to spend some time thinking about the effect of a change in the interest rate on your current investment situation.
When choosing a Real Estate Investment Loan, you want to have an eye on current interest rates, future interest rates and the penalty that you might have to pay should you want to refinance your loan later to take advantage of a subsequently lower interest rate. So an obvious thing to do is to get a fixed interest rate, if you think that the interest rates are going to be higher in the next few months. The way to analyze this is to spend some time reading the business part of the newspapers to consider how monetary policy in the Federal Reserve is going to be in the next few months. This explains why some financial institutions and large property developers hire former Federal Reserve executives to tap on their expertise in understanding Federal Reserve Policy.
Another related interest rate investment strategy pertaining to Real Estate Investment Loans is to buy the property “subject to the existing mortgage” if the mortgage was locked in at a lower interest rate than the prevailing market rate. This particular strategy works well in a rising interest rate situation. Remember that a slight percentage increase may translate into a large jump in the amount of interest that you are paying so it would be wise to do your maths and get a friend to double check it before you leap into a deal.
2. Rental Yields
The most common indicator and thing that people would know about rental yield if you ask them is the Return on Investment (ROI). This is the annual rental as a percentage of the total cost of the property. So for example if I had paid $100,000 for the property and I recoup $10,000 per annum, my ROI would be 10%. Note that as a quick rule of thumb this also means that (excluding interest), you would fully pay up your property in ten years if you apply the full rental proceeds to servicing your real estate investment loan.
However, ROI is not the end all and be all of the analysis, another consideration when analyzing Rental Yield is not only the current or past rental yields but the future rental yields. Thus in order to do future projections, we need to study the property cycle of the target country and examine economic factors which may affect supply and demand of rental property in the area.
For example, let’s say that we deem a particular Real Estate Investment viable this year for the purposes of cash flow and get a Real Estate Investment Loan. But what the you might have not considered is that you bought the property at a high in the property cycle and rental demand might go back to normal levels thereafter, rendering your so called Real Estate Investment in negative cash flow territory. So we can observe that you need to learn about the potential downside of your investment and do your sums carefully before you embark on getting your Real Estate Investment Loan.
In conclusion, having a good understanding of interest rates and rental yields will enable you to profit from Real Estate Investment and as such it would be imperative to learn all you can about these things in your target market so as to maximize your profits and yields. Investing in property when viewed in this light can be said to be a science and it sometimes is best to treat it as such so as to remain detached when deciding on whether to enter into a deal.