When a real estate investor is buying property and paying for it by taking a mortgage, he or she relies very much on leverage. It is a phenomenon most commonly used by investors to accelerate the might of their money.
Why should you use your own capital when you can easily get somebody else’s? Here are several mistakes to avoid when dealing with leverage.
Predicting the Market Wrong:
There are many reasons for deflation in the real estate market. They include but aren’t limited to the uncertain local economy, unexpected changes in tax or interest rates, or even the uncontrollable natural disasters. With all of these always looming over one’s head, the market can be predicted.
So when the investors get smart and assume the market is going g up, they are making a huge mistake. It’s doesn’t take more than six months for the market to fluctuate, and it can go either way. For short term investments, this is a big no.
Overestimating the growth is one way of pushing yourself to the doom, and many investors don’t even realize this simple fact about the real estate market. Things can go haywire when an inventor can’t realize the profit he forecasted due to his overestimation.
For a real estate, the perfect thing to do is prepare for all the looming scenarios. He should have a sense of what to do in the best, the worst as well as most likely cases. Either he should prepare himself of these or go for a moderate forecast.
These smart moves will enable you to keep you financial propositions intact even in the worst situation.
Servicing the Debt:
Real estate is a business of facts and realities; there is hardly any room for assumptions, let alone absurd assumptions that might break you into pieces and flood your entire business overnight. While acquiring the leverage you need to run your numbers to perfection, many investors hastily acquire the leverage, but when the time comes to pay back the debt, their calculation makes them go bankrupt.
Almost all banks have a strict policy of not touching a client that comes through their doors, seeking a loan for a distressed property. So, the investor has no other option but to go with hard money lender to finance the first round of their property acquisition. Hard money or private loans come with a shelf life of a minimum of six months and maximum one year.
Now, this option works well for short-term investors who renovate and sell the place in three to four months and service the loan. However, this is not ideal solution for long term investors.
All in all, an investor should be well aware of his cash slow situation as well as the payment structure, as these have high-interest rates than average loans, before opting for a financing option.
Funding Doesn’t Mean a Good Deal:
Don’t get yourself in hot waters by assuming that quick funding approval will result in a good deal. Like many other investors do not fall in this trap. You don’t know what your lender’s motivation is, your downfall can be his gain, and it all depends on who you have chosen to make the deal. Lenders not only keep an eye on the cash flow but also on your credit. You never know, your lender might just be setting a trap for your deal to get sour and get the ownership in very economical cost.
So, don’t make any hasty or borderline purchases, done assume falsely that by getting the funding you will land yourself a great deal. This is called the deal fever, and many have fallen for this in the past.