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How to Avoid Over Finance?

How to avoid over finance? It’s a common mistake in a property investment strategy and with the introduction of 90% to 100% loan to value mortgages on investment properties, many property investors are taking opportunity to refinance their properties at a higher percentage of value than ever before…

Many real estate investors are taking cash out at the closing for personal use and are thinking of this borrowed money as a profit.  Do yourself a big favour and avoid the temptation (and the strong come-ons by some lenders) to do this…

over finance
How to Avoid Over Finance - financial fears and if your money be safe?

Avoiding over finance…here’s why? If you over finance your property, you might not be able to sell it for what you owe on it. We get calls from landlords in this position literally everyday.

Last week we talked to a guy which paid over $780,000 (full value and his first mistake) for a home last summer. He borrowed $676,000 to buy the property (close to full value and his second mistake).

Now his tenants are driving him crazy and destroying the investment property and he wants to sell. He really can’t sell to another property investor because no educated investor will pay him what he owes for this property.

He can’t sell to home buyers because the property is too damaged. His choices are to keep it until appreciation and mortgage pay-down bring value of property and debt into line or spend another $15,000 restoring the property so he can sell to a home owner for retail value.

If you over finance your property your cashflow suffers and your property suffers. We got a call yesterday from another long time property investor which got a second mortgage a few years back to take some cash out for personal reasons.

Unfortunately, the total of the two payments plus taxes, insurance and other expenses are more than total rent tenants pay. He’s taking about $250 a month out of his pocket to own the property and hasn’t been able to keep up with repairs.

Now the city has placed work orders on the house and he doesn’t have the money to complete them and he doesn’t have any equity to borrow against.

Two of the 3 units are vacant because of the condition of property and he’s trying to unload it because he can’t afford to make his mortgage payments. In all likelihood, he’ll lose the property.

In the short and long term, you’ll pay an arm and a leg for the additional money you borrow. If you’re offered a 100% cash-out refinance of an investment property, ask the lender what costs are associated with the loan.

You’ll find many mortgages like this carry costs of 5-10% of loan amount in points and fees. Get out a financial calculator and check out the difference in total interest payments between a $700,000 property financed at 80% of its value over 20 years.

Do the same calculation for the property financed at 100% of its value. At 100% financing you’ll pay additional interest payments and this is money which comes straight off your bottom line. Please don’t think you should never pull cash out of an investment property.

There are some great reasons to do exactly that when you want to buy more investment property. Keeping your total debt to less than 80% of value of property is the safest and most profitable way to manage your cash flow and portfolio.

How to avoid over finance? Spotting the mistake before it happens like borrowing more money than you can afford may make you feel richer in the short term, however it’s a financial recipe for disaster.


Why Invest In Property? | How to overcome paralysis of analysis?

Over Finance

Buy Investment Property | home buyer vs property investor

Buy Investment Property 

To buy investment property from a home buyer’s perspective, would you buy investment property before your first home? There’s a proven strategy to buy investment property, right? Are you a first home buyer?

If you buy investment property, would you consider giving up first home buyer’s grant and continue renting so you can start building a property investment portfolio first?

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Buy Investment Property - Why consider using a buyers agent or buyers advocate?

If you buy investment property, it means you could quickly yield income in two ways through rents and capital gains. Are you considering buying investment property before making the emotional plunge into home ownership?

Most home buyers expect their first property investment will be their home, but are there good reasons to buy investment property? Why? Because there are pros and cons depending on your focus and circumstances.

There are two types or classes of investors, fundamental and professional. As a professional property investor, you’re consulting with advisors about your financial plan and investment strategy for maximising profits and tax deductions, right?

Professional property investor establish the team and only after consulation buy investment property making sure finance is pre-approved.

As a home buyer or property owner, you’re buying property before finding your team of advisors…does that make sense?

First step; build your team of trusted advisors because if you haven’t got a solicitor right now, you’re not ready to buy.

Does it make sense or do you think it’s logical to buy investment property in your own name and to buy without consulting financial advisors first:

  • Accountant
  • Solicitor
  • Financial planner

Next logical step is to make sure your team is experienced with proven results in the area you want to achieve. It’s important to understand once you’ve bought investment property, it’s expensive, difficult to change names and entities, right?

Why make property investments your long term plan?

If you choose to buy investment property short term, this means 5 to 7 years and long term is 10 years plus. So if you’re buying investment property and looking to sell in one to two years, the buying and selling costs would make it prohibitive.

Would you be better of looking at another investment source?

Perhaps risk minimisation and asset protection are far more important to you than wealth creation? If you’re not protected for personal injury, sickness or liability it disappear fast.

That’s why you’d be very smart in utilising income protection, landlord’s insurance, building insurance and ensure you get adequate cover which is all very important.

Location is the fastest and safest rule for where you buy investment property. The choice is for a thriving infrastructure. Do research using government websites and see where government is allocating funds for infrastructure.

Now, if it’s in a capital city make sure there’s already good infrastructure in place with established roads and good councils with established suburbs.

New suburbs generally take 10 to 15 years to level out so you want to take all this data into consideration for picking a town. It’s a good idea to stay away from areas linked directly to only one source of employment…

When is a good time to buy investment property? Firstly, it’s critical to do your research and know property cycles, so you need to consult your team of advisors in respect to different types of property investments.

The fact, the best time to buy investment property it really all depends on your own personal circumstances. What if right now is the best time to buy investment property?

Here’s a short property investments check list:

  • Are you developing a long-term financial plan
  • Are you between 20 and 60 years of age
  • Is your current income bracket more than $40,000
  • Do you have a strong income history with access to borrowed funds
  • Can you easily invest $50 to $150 per week
  • Are your personal finances organised in a structured way

If you answered “Yes” to most of the above, are you ready to go with new property investment opportunities? Next logical step is to make sure your legal structures are in place and how to best utilise the tax system for your wealth creation…

Only if you fully understand property investments as a long-term strategy can you appreciate and accept it as a non emotional decision…does that make sense?

Property Investments Now can help you to buy investment property with a goal of reducing your taxable income and increasing your income streams using cash flow property

Buy Investment Property