Understanding Your Investment Debt
If you're planning on purchasing real estate, chances are you are going to need access to someone's cash in order to pay out the seller and get the title to the property. Basically you have three financing options:
Use your own money. Borrow someone else's money. Use a combination of your own fund and what you can borrow form someone else.
Today we are going to look in more detail at the first option - using your own money in relation to your investment debt. This may appear to be the option with least risk because you avoid the need to borrow. Additionally, when interest rates rise you won't get caught out having to make higher mortgage repayments. There is a downside however, and we are going to look at two issues that pretty much eliminate the option of putting 100% of the capital down from your own savings.
1. Investment Debt - Your Cash Supply Is Limited
Unless you have a money tree growing in your backyard, the size of your property portfolio will be limited by the amount of your own cash reserves. This would restrict most people to a maximum of one or two investment properties.
The underlying motto behind most successful property investors comes from doing something completely different. One manifestation of this principle is the concept that property investing is most profitable when you own multiple dwellings. Think about it. What's the use of a moneymaking strategy if you can only implement it once or twice before it runs out of steam? Surely, if you can devise a winning strategy then you'll want to implement it over and over again!
2. Investment Debt - Limited Asset Diversification
Since the number of properties you can afford without debt will be limited, the risk you eliminate from having zero debt re-emerges in a different form - all your property investment eggs are sitting in one basket, effectively under one or two roofs.
In this situation the risk of vacancy and market exposure become serious threats to your success. Consider the dangerous impact of having no income if you only owned one higher-value property that sat vacant for long period คอนโดมือสอง กรุงเทพ of time. Alternatively, what if your one investment property suffered a sudden drop in value?
Owning multiple properties, or a diversified property investment portfolio, provides some natural 'insurance' against these risks. To give you an example, if you owned 8 properties, then all 8 would have to be vacant, and all 8 would need to drop in value for you to be in the same risk position. Clearly this is very unlikely to ever be the case.
So the moral to this simple concept is simple, diversify. Risk exists whether you have 1 property or 10 properties. Given the possibility of reward is greater from having a larger portfolio it seems logical to borrow and ensure your success.
What are your thoughts about property investing? Do you agree that having multiple properties is a safer alternative? Perhaps you have some advice of your own to add to this subject.
Let us know your thoughts and ideas in the comments box below.
Disclaimer: Information provided in this article is intended to be general in nature only. This does not constitute specific financial advice to individuals, groups, business or corporations.
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