Finance is an important factor in determining how to purchase real estate income property. Do you, as the investor, desire to use leverage in order to buy a more expensive property with less equity due to the tenant’s credit? Or do you pay all cash?
Both choices will greatly affect the cash flow or the final outcome of the investment. And because today’s interest is so low many real estate investors feel confident about borrowing money on income deals today. Is this really wise or not?
Consider Your Margin
What really matters is the margin between the loan amount at what interest is charged on the loan and the cap rate paid for the real estate income property. How long is the loan in place for at a fixed rate of interest? And is your guarantee necessary for the loan or not?
If the tenant does not have increases in the rent and interest rates should rise, along with a current loan that is too short in terms of length, you may get in a very difficult situation when your loan comes due. If rates to refinance are high at this time, and you still owe a large amount on your loan, your cash flow will dwindle along with your real estate income property, which will decrease in total value.
Sometimes Paying Cash For Your Next Real Estate Income Property Is Actually The Better Choice
Longer term loans over ten years (nonrecourse) are the best vehicle but aren’t always available for every income property or tenant. That is why paying cash may be the better option than borrowing money even though the rates seem low.
It’s easy to assume that you’ll be fine borrowing at so little of a rate of interest, but believe me, you still can! So not making the deal could be the best result. Leverage of 50 percent to 60 percent gives you a safer better chance of a long-term good outcome than a higher leverage deal like 75 percent even with a lower rate.
Don’t Feel Pressured To Do The Deal
If you don’t currently have enough equity saved up to really enter this real estate income property market correctly, stay put until you do or look at alternative strategies that require less money, no loans and let real estate pros handle the entire deal, not you.
Interested in moving to the next level, and acquiring a commercial income property that will help you reach your passive income goals?
Contact Jeff Gitt at 314-757-1031 for more information, or to find out about the equity and finance options offered by Westwood.