Real Estate Leveraging

Leveraging is a technical term meaning borrowing to invest. More specifically, financial leverage takes the form of a loan reinvested with the hope to earn a greater rate of return than the cost of interest. For years leveraging was mainly used in the Stock Market for brokerage margin accounts, that is arrangements in which investors bought stocks ‘on margin’, putting up only a percentage of the total cost. The brokerage firm effectively provided a loan for the balance. With the appearance on the financial scene of home equity lines of credit in the 1990’s, leveraging was adopted by investors and speculators in Real Estate as well.

Home equity lines of credit meant that ordinary people who had benefited from the big run-up in housing values during the 1970’s and 1980’s suddenly had access to large amounts of cash. In most cases, these were not sophisticated investors – in fact many of them knew very little of real estate investing. But they had home equity and could suddenly tap into it. The same phenomenon has happened in the early years of the millennium with a new generation of real estate investors, who have used their equities to purchase and add up inventory, thus contributing to the price increases of these past few years.

The math of leveraging has always been very seductive, both as it applies to the Stock Market and in Real Estate. All the more so at the time when markets were soaring. With leveraging, one uses other people’s money to enhance his own profits by acquiring additional interests in land. This enhancement process takes the form either of added equity, which is realized at the time the real estate asset is sold, or as additional cash-flow, as in the case of rental properties. Either way, it was easy to make a compelling case for borrowing against home equity to invest.

There are, however, pitfalls in leveraging that must be brought forth to the uninitiated investor. For one thing, while leverage allows greater potential return to the investor than otherwise would have been available, the potential for loss is greater because if the investment loses value not only is a portion of that money lost, but the loan still needs to be repaid in its entirety.

Secondly, the problem with leveraging in Real Estate does not relate to its potential value as an investment tool but, rather, to the emotion that invariably is involved in any real estate transaction. People tend to be persuaded to borrow against the value of their homes without truly understanding the risks involved and the potential distress that losses may cause, especially when the market is in retreat and prices are dropping. This is the reason why a small but increasing number of investors find themselves into the predicament wherein they have saved and scrimped all those years to pay off their mortgages and are now right back where they started.

Leveraging is a suitable strategy only for investors who are experienced and knowledgeable. Unless one is prepared both financially and psychologically to deal with what could be severe short-term losses and stick with the investment for the medium to long term, one is not a good candidate for leveraging. And even then, when the investor has the know-how and the stomach for leveraging, certain rules of thumb are always helpful:

[ ] Invest when prices are low, not high.

This sounds obvious, but unfortunately there is a natural tendency to shy away from real estate when markets have peaked and prices are falling. Conversely, when property values go through the roof everyone wants a slice of the pie. This is specifically the reason why it is so easy to convince people to use leveraging when everything is on the rise, and almost impossible to get anyone to listen when markets are in deflation.

But it is exactly during falling markets that leveraging offers the best capital returns in the medium to long haul. Interest rates are low, so the cost of borrowing is minimized. Financial institutions are looking for customers and it is easier to cut a better deal or get incentives from them than would be the case otherwise. Sellers too are more motivated and more flexible on prices and terms of contract.

[ ] Be selective in what you buy.

Go for the quality of the real capital asset. A house, or multi-family dwelling that is well maintained and well kept will hold up value better in the long run, and will save the investor money in upkeeping as well. In the case of rental properties, it will be easier to find tenants willing to pay more to relocate into a nice-looking property.

[ ] Take the profits and pay down the debt.

Greed is always dangerous in any market, and this is where most people fall. Do not keep reinvesting the profits. That is like betting all winnings on every new roll of the roulette wheel. By doing so, investors expose themselves to new risks every time they use leveraging to reinvest, and sooner or later they will lose because they do not stand on solid financial foundations. The best and safest strategy is to use cash-flow to pay down the loan, or to wait for prices to increase and then sell for a profit.

[ ] Pay the lowest possible interest.

Even though the interest is tax deductible, investors have still to pay some of it out of their own pockets. If the loan is substantial, that could amount to several thousand dollars every year. So therefore it is always advisable to shop for the best deal available, using the services of a good mortgage broker.

Luigi Frascati

Online Real Estate – Educational Opportunities

There are a number of online schools and training facilities that are available to provide students with the real estate education they need to start an exciting career. Real estate professionals work to provide various resources to their clients. These clients utilize agents to build, sell, and rent properties such as offices, houses, and more. Students can obtain an education to become a broker or agent, appraiser, or manager, and learn to appraise and inspect properties, rent and lease homes, manage agencies, and more. With proper training students can obtain the knowledge and skills to become the real estate professional they desire while earning the degree or certificate they need.

  • Real estate degrees and certificates allow students to become educated in the specific area of their choice. Degrees are available at an associates, bachelors, masters, and doctorates level for students looking to become entrepreneurs. Students who wish to obtain professional certification can also train online for their career of choice. Students can prepare for the career of their dreams with coursework provided by online degree and certificate programs. Online schools provide the opportunity to earn professional certification or a degree from the comforts of home by enrolling in an online program. Curriculum offered by educational institutes will vary depending on the school and career level.
  • There are a number of courses in real estate that students are offered through online educational programs. Much of the coursework will be the same for most real estate professionals, but specialized areas of study are also included in training and will depend on the type of career. They will complete coursework such as listing and document preparation, advertising, and more. An online program geared toward appraisers will include areas of study like finance and law. Students training for a career in property management may learn business administration, leasing, and more. Online courses allow students to learn how the industry works, and provide students with information about various real estate professions.
  • There are a number of related professions to choose from including real estate broker or agent, appraiser, property manager, and more. Professionals in this industry are trained to carry out a variety of tasks. Theses tasks depend on the career profession each student chooses to pursue. Property managers are trained to run the daily operations for apartments, shopping centers, offices, and more. Their job description may include the upkeep of outdoor areas, resolving complaints and maintenance orders, and more. Appraisers work with various financial institutions and clients to appraise residential and commercial property, research data, write reports, and other tasks. Students looking to become brokers will train to work with buyers and sellers. Brokers or agents are in charge of negotiating prices, advertising properties, submitting client offers and other related tasks. With an online school students can prepare for the career of their choice.

A variety of employment opportunities are available in the field and students can choose to earn their certificate or degree in more than one area. With an education in real estate students can work for existing agencies or start their own business. A number of states require that real estate professionals be licensed in order to provide their services. Licensed professionals in this field may be able to choose whether they work full or part time, and so can you with an education in real estate. Not all programs are required to carry full accreditation so students should look into this prior to enrollment. Accreditation is provided by agencies like the Distance Education and Training Council ( http://www.detc.org ) to provide proof that a quality education will be received.

DISCLAIMER: Above is a GENERIC OUTLINE and may or may not depict precise methods, courses and/or focuses related to ANY ONE specific school(s) that may or may not be advertised at PETAP.org.

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