REAL ESTATE INVESTING 101.
Investors are a group of mortgage borrowers that have persistently and profitably used mortgage financing to establish their real estate empires, therefore using mortgage debt as a necessary financial tool. The average consumer will declare they “hate” carrying a mortgage and yes, it is a thing abhorred, except if it used to generate loads of wealth.
Striving to build a sizeable real estate portfolio involves a lot of research and careful planning but once achieved can generate wealth not only for property owners but for their families and future generations. Having wealth in real estate can exempt a person from economic uncertainty since someone who produces substantial investment income or has assets they can liquidate, for example, is less likely to experience financial crises.
Throughout my career, I have had the pleasure of helping individuals build wealth through real estate. I have watched mortgage financing become an exciting endeavour when it is used to build a real estate portfolio.
Leveraging mortgage debt means a person borrows capital to make maximum profits that supersede the interest paid on that capital. Although it’s a basic concept, it can become complex and somewhat scientifical when purchasers own multiple properties, which is likely the reason more people don’t have larger real estate portfolios or any at all.
Below, I will explain some basics people should consider when building their real estate portfolios that will ensure success.
To successfully build a real estate portfolio, each property needs to get purchased with careful consideration of:
1. Cash flow Potential; and
2. Length Of Time Before Mortgage Debt Gets Repaid.
Cash flow is how much money is available after expenses get paid. For example, if the principal and interest payment is $1,500 per month, and property taxes are $350, then how much income the property generates above and beyond this amount is critical. The amount of cash flow will determine to what degree the property is acting as a successful investment, if at all.
Some believe cash flow should add to supplementary income. Not always and never right away. Initially, cash flow should be used to shorten the length of the mortgage. For example, if the property cash flows $600 a month then that money should go toward prepayments.
In the above-scenario, prepaying could reduce a twenty-five-year mortgage to a ten-year one and, therefore, any investor should analyze how soon cash flow will pay down mortgage debt when determining whether an investment property is worth purchasing.
The truth is if an investor breaks even or contributes a small amount of their own money each month to help carry the property's expenses, their investment is not as successful as it should be.
Building a truly successful real estate portfolio involves taking necessary steps to ensure the mortgage is for the shortest term possible. Successful investors know equity must be available to leverage as soon as the next opportunity presents itself.
Keep in mind, the economy may not always provide the circumstances that will cause property to appreciate so an investor should always lay the foundation for success regardless of market conditions.
Mortgage financing is an obvious necessary step in building a successful real estate portfolio. However, most people get it wrong when they believe getting a mortgage and refinancing a short time later to buy another property is building them wealth the fastest way possible. As mentioned above, a mortgage is a financial tool meant for the shortest term possible. Therefore, cash flow to shorten the amortization is not only crucial for wealth building but necessary to qualify for additional financing.
Mortgage lenders usually get squirmy and hesitant about an investor who owns more than four properties and is applying for more mortgages, and especially if those properties have large mortgages on them. To keep building, existing mortgages require maintenance and a plan to reduce their balances as soon as possible. A plan of this nature ensures that investors always remain attractive covenanters to mortgage lenders.
Although there are more factors to consider in wealth building through real estate, it's important that investors consider the basics.
I specialize in helping investors structure their mortgages effectively to ensure they are cash flowing. I also help investors reorganize their personal debts and liabilities to cash flow within their own finances.
Please call or write if you have questions about your current investments. I would be more than happy to help you free of charge.
Sarah A. Colucci, Sr. Mortgage Agent/Mortgage Edge, Broker 10680
Want to win $10,000? If you complete a mortgage with me between now and December 31, 2020, you will automatically be entered into my "Mortgage With Me" Contest Draw to win!
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By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929