subject: Why Property Is Always A Good Investment [print this page] When it comes to investments, there are few that are always as reliable and easy to finance as real estate. Commercial and rental properties allow the investor to actually make money on the deal even while it is being financed. Certainly the real estate market has its up and downs, but the investment will always appreciate, unlike shares in the stock market.
Getting Started
The first place to start is by finding a property. The key to making a profit is to find a high-value property that is offered at a discounted price, and one that is already rented or has good potential to be fully leased - creating a positive cash flow situation.
The next consideration is financing. The home owner who has equity in their house can take out a line of credit against the value of the property. This line of credit, or second mortgage, is used to fund the deposit on the new real estate purchase. With an 80% loan, this gives the investor an idea of the price range they should be searching in.
Example Investment
Here is an example of property deal that would make a good investment.
The property is valued at $375,000 and purchased for $300,000. It brings in rental income of $475 weekly.
To purchase this property, you would need to have $60,000 as the deposit with the remaining 80%, or $240,000, financed by the bank. Using your line of credit as the deposit, this means the property is 100% financed by two different loans with no cash outlay.
After six months of ownership, it is possible to refinance. The property is still valued at $375,000 and with the 80% financing rule of thumb, this means a new loan can be written for $300,000 and the $60,000 initial deposit returned to pay the line of credit loan.
This example illustrates the importance of finding real estate that can be purchased for 20% below value.
Consider, also, that you are receiving rental income the entire time. With a rent amount of $475 weekly, this translates to $24,700 per year, giving the investor an 8.23% return. When the loan is financed at a less than 8% interest rate, this results in a positive cash flow. Purchasing the property through an LAQC allows the investor to take a deprecation allowance on taxes and receive a refund.
All in all, this is a win-win situation. There is no cash outlay, rent pays for the expense of the loan and associated maintenance costs and fees, and ownership allows for a refund cheque from the IRD. The longer you hold on to the property, the more likely it is to rise in value, providing an even larger return on investment over time. Obviously property investment is quite worthwhile.
by: Paul Easton
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