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Real estate investment is becoming more and more popular, and not just for property developers. An increasing number of regular homeowners are purchasing second homes to flip or rental properties. First of all, investing in real estate provides an attractive return on investment. Investors can generally use only a small amount of their own capital as a down payment, and receive the remaining amount of money required to purchase a property as a mortgage (for example, 10% down payment and 90% financing from a mortgage). This is known as the “principle of leverage”. Then, because real estate appreciates at an average of 5% per year, the investor can recuperate their investment, plus any profit made after repaying the mortgage. Another option to make money off of real estate is to purchase a rental property. Investors are still able to use a relatively small amount of capital to start, and then are able to charge rent for tenants to live at that property. Any rent that is above and beyond the mortgage payment and cost of maintenance is profit. Real estate investment is also beneficial for those who have a hard time saving money, as it can act as a sort of forced savings account. Essentially, as you pay down the principal of a mortgage, you're reducing debt and building equity. Then, when you go to sell the property, the money you receive back from the sale is considered your “savings”. Many people want to enter the domain of real estate investing because, although it is possible to lose money in real estate, the risk is fairly low. However, keep in mind that this number is just an average, and one must also take into consideration certain factors when choosing a property, such as desirability of location and stability of the market. Finally, one more attraction of venturing into real estate investing is the fact that it really only requires part of your time, is flexible, and the skills can be learned. The process is relatively easy, and is therefore easy to pick up on. It does, however, require motivation, drive, a positive attitude and the desire to pick up key principles, strategies and techniques. There are many rental financing options available for those wishing to get into real estate investment. Loan-to-value amounts below 80% are considered conventional mortgages, and loan-to-value amounts greater than 80% are considered high-ratio mortgages. For loan-to-value amounts greater than 75-80%, the borrower will have to pay a mortgage insurance premium (as with any other high-ratio mortgage). It's important to note that the CMHC or Genworth insurance premiums are higher for rental properties than they are for principal residences. An option for rental property financing that is becoming more popular is the interest only mortgage. It allows the property owner to pay monthly payments of only interest on the principal amount. This is good for property owners because the rental building will generally appreciate - so they’ll still obtain a profit when the property is sold - and they will have greater monthly cash flows from renters (rather than paying down a mortgage with the rent they charge). This allows the investors to possibly invest in other properties, as it allows them to build capital they can use for down payments on other properties. Also, Interest paid on borrowed money for investments (in this case an investment property) is tax deductible so you can obtain a bit of a tax break from the interest you pay on your investment property mortgage. The more interest you pay, the bigger the tax break is.
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