Real Estate Investment Funding

When you are looking for real estate investment funding options, you should consider making a large down payment if at all possible. By making a down payment of at least 10%. You will create instant equity and more often than not, get a lower interest rate.

This level of initial outlay decreases your liquidity — you have less cash after the deal is closed — but there are few investment alternatives that have the return rate, low risk level, and degree of capital appreciation as real estate.

When considering real estate investment funding options, make a decision on how long you plan to hold the property. Adjustable Rate Mortgages (ARMS) provide the option of getting in with less cash and a fairly attractive low relative rate. There are 1 year, 5 year, and even 7 year ARMS — the number signifies how long the offered rate is good for, after which it will be adjusted according to prevailing interest rates.

If you decide to hold onto a property longer than the initial period, the interest rate will start to increase by several percentage points. Unless you sell the property, or pay down the principle significantly within this time frame, you will most likely end up with much higher monthly payments.

While the ARM rate is climbing steadily, property values begin to level off or even decrease due to rising interest rates. Your investment receives a double hit. It is of course possible for interst rates to decrease, but that is a far less common scenario. Refinancing with a fixed rate may be a better option.

Some insurance options can cover the payment increase in such scenarios, but they are not usually worth the additional expense if you pay more than two years of premiums . It's better to apply the extra funds toward the principal by making extra payments, or paying more than the monthly minimum payment.

If you are unable come up with a larger down payment, weigh the value of renting against any tax breaks you receive from owning a property purchased with little or no down payment.

So, when considering your real estate investment funding option, try to invest as much as possible up front, make a minimum of one extra payment per year, and lean toward fixed rate mortgages of the shortest duration you can afford. A 15 year mortgage will pay the principle down faster, with less being spent on interest. This also increases your equity faster, along with (more often than not) carrying a lower interest rate.

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