How can you really invest in property with other people’s money? It sounds like a gimmick, but it’s quite real, and from my many years of experience within the real estate sector, I will tell you how it is done. This blog will examine the methods required to buy investment properties, how they can be purchased with other people’s money, and why you may want to use this method.
Let’s start by understanding how the process of buying real estate works. When purchasing an investment property that is not your principal residence, you will require a deposit or downpayment of 20%. First time home buyers can avail of lower down payments and government grants, but the property needs to be your home. A key element and advantage of real estate is that the asset you invest in usually appreciates in value over time. It does not depreciate as much as other assets like cars or boats, which lose value over time. Another fantastic advantage when purchasing real estate is that you fully own the asset by investing only a portion of the purchase price. How can this be done, I hear you ask; well, let me tell you how.
After I purchased my first property, I attended many real estate seminars, where they showed me how you could buy a property with other people’s money. I learned to replace “other people’s money” with the word “loan”. A loan repayable by instalments with interest rates can be found in many options such as banks, private lenders, money lenders, and the bank of mum and dad, a very trendy bank right now. These people can loan you the capital to fund the property that you want to buy, and as it’s seen as a safe investment, it’s a more accessible loan to secure. So why use loans to purchase real estate?
Because of leverage, real estate is the only asset that you can buy with a portion of the cost price. They’re not going to give you a third of a house if you put only 30% down; they’re going to provide you with 100% of the house and its full appreciation benefit. Let’s take a look at two different scenarios. Joe has $100,000 to invest. So he decides that he will buy a house as a rental investment with a rent of $1000 per month, which will yield $12,000 a year, a 12% return on his money. That’s a solid return. So what happens if he uses loans to buy more property? He will use the same $100,000. But now he’s splitting that 100K into five portions that represent the 20% deposit or downpayment required to purchase five houses. But now, he has to make a mortgage payment every month.
So with that said, instead of receiving a return of $1,000 for one month’s rent on one house, he’s only going to get $300 after he pays for his mortgage. So if you multiply $300 per house times five houses, now he will receive a return of $1,500 a month – an 18% return on his $100K investment. He is also benefiting from the full appreciation of each property and, at the same time spreading the risk if a tenant in one house fails to pay rent or vacates the property, the other four will still provide him with an income.
Suppose his goal is to sell one of these properties in five years, and it has appreciated to $200,000. In that case, he will be able to repay the entire mortgage and probably pay down some of the mortgages in the other properties, increasing his cash flow and therefore increasing his return. This is why you want to use loans as much as possible. To be able to acquire more properties.
Can you do this? In the words of Barak Obama, yes, you can! It’s easy, along with some planning and advice that will help you secure the best rates and give you the many options available. I am always available to help, so please have no hesitation in contacting me to discuss any questions you may have. Until next time take care.
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