KNOWING THE FUNDAMENTALS
A good place to begin developing your investment goals is to determine how this investment fits in with your existing investments. Exactly what do you expect ownership of this property to accomplish for you financially? Will it complement your other investments? Will it be a sound building block as you increase your real estate holdings? Will its ownership endanger your ability to stay current on paying your primary home mortgage and maintain your other investments, or will it possibly cause you to liquidate part of your existing portfolio or cause a premature sale of this prospective investment property at an inopportune time when there are fewer buyers than sellers? Should your strategy be to initially buy a modest property, learn more about property investments in that market, and then trade up to a larger property later that more closely meets your goal of owning a “dream house”? If you are considering buying a vacation or investment property prior to retirement, how will this house fit in with your lifestyle, income, and savings at that time? Plan ahead, deciding whether it is preferable to pay all cash now or buy it with a mortgage and invest more cash to payoff the loan closer to your retirement.
This analysis requires you to determine whether most of your money can be more productive in alternative investments for a while or whether you are better off by paying cash now. You are faced with a fundamental question: Do you expect to earn more from your securities and other real estate or from the appreciation and rentals from this vacation property? A frank answer to this question will determine whether you liquidate some of your other investments and pay a large down payment (or perhaps all cash) or retain them and place a smaller down payment on the cottage or chalet.
Regardless of whether or not you have arrived at the point where investing in Real Estate would be a means to a better end, we can sit with you and help you in determining your goals and financial needs. It should be pretty clear which direction is best for you. We can even assist you in determining the preferred area for investing and if partnership investments interests you.
Who knows, it might be right in your very own backyard!
Our team travels to various states and meets with property managers, owners, and investors to discuss the right opportunities. If you are interested in inquiring about these current activities send us a message.
Leverage is the result of borrowing capital for an investment. The key thing for you to remember is that leverage multiplies financial results. It may be either positive or negative. For a strictly income-producing investment, there is positive leverage when the cash flow is positive. That is, there is positive income after all the property operating expenses and the mortgage payments have been paid. However, a rental vacation property generally will not produce positive cash flow. Hence, it generally is wise to use less leverage (debt) than would be typical for a commercial or retail investment property.
Never overestimate your financial capacity to carry a real estate investment during (1) the initial period needed to build up a stable rent roll, (2) slack rental seasons, (3) overly competitive future markets, or (4) a downturn in the leasing market or general economy.
At least initially, it would be prudent to obtain a conservative mortgage loan on a vacation property. By investing more equity in the form of a larger down payment, your mortgage payments will be less and protect your investment if rental income declines, the economy sours, weather conditions deter tourism and in turn reduce rental activity, or if operating expenses and repairs rise unexpectantly. Another reason to avoid thin equity (via low down payment) is that in addition to increasing your monthly mortgage payments, you may have sharply rising expenses unrelated to the vacation property, which could affect your ability to retain the property. You certainly don’t want to lose this property because of your inability to stay current on the mortgage payments, insurance, real estate taxes, and repairs.
(1)Net worth is the amount that assets exceed liabilities. Assets may be free and clear or encumbered by debt. The cash value of insurance policies, not the much larger face value, would be included as an asset. Liquid assets can readily be converted into cash and include bank accounts, stocks, bonds, and the cash value of insurance policies. Non-liquid assets cannot easily be converted into cash for the down payment. These include other real estate, automobiles, and possibly retirement accounts. Included under liabilities are unpaid debts.