About Mortgages | Things to Think About when Owning Real Estate

Advice on owning Real Estate

Owning real estate is expensive for most people. Buying a property means one takes the risk that the value of it will fluctuate widely for a number of factors. Among those, there are accidents and unpredictable natural disasters like fires and earthquakes. However, it is basically considered possible that most real estate risks to be kept at a minimum by recognizing the following three points.

  1. Understand clearly the value of the property and to buy it at a reasonable price.
  2. Take into consideration your economic condition and calculate the timing of future needs.
  3. Be aware of the amount of risk you are able to take.

Next is to think about in what form to buy real estate. In most cases, people take out a loan. Points to note about loans are as follows.

The Way of Thinking about Loans

(When Buying One’s Own Home)
It does not produce income. Therefore, it is necessary to have a reliable income with clear future prospects to know your ability to make payments will remain stable.

(Rental Properties)
Usually the structure is to get a loan and pay for it with the rental income. Interest rates tend to rise when the economy is good, and therefore there is a risk that the cost of debt will rise if a floating rate is chosen. In cases where the monthly costs exceed the rental income, it becomes the situation in which the owner needs to make a ‘payment’, rather than collect ‘income’ every month. This will not be a problem if the investor can be compensated in the end by selling the property at a big profit. However, one must carefully consider the monthly rental income (cash flow) compared to a potential sales price.

The situation of ‘payment’ occurs when the short-term interest rate rise sharply. Usually, the time when interest rates rise is when the demand for money goes up, in other words, when economy is good and enterprises start borrowing money from banks to make investments in improving or expanding their businesses, such as upgrading plants, etc. The time when the economy gets better is considered the time that corporate profits are growing and therefore stock prices rise as well. In these times, it could be considered as good timing to sell the properties. It is very important to consider the ‘payment’ risk in relation to the potential profit of selling.

There are two points to be aware of:

If I can buy in cash, is it better not to get a loan?

No. It is not necessarily so. Buying in cash without a loan eliminates the risk of rising interest rates, but on the other hand, reducing cash on hand means that:

  1. if something unexpected were to happen happened and a large amount of money was needed for maintaining the real estate (responding to unforeseen circumstances).
  2. if other good real estate opportunities were to present themselves, you would be unable to buy them or you would be subject to restrictions on that investment activity (loss of investment opportunities).
  3. You would lose the advantage in terms of tax savings when utilizing a loan.
Credit of an individual/corporation is very valuable. Especially when it is possible to borrow money at a very low interest rate like today. Being aware of the risks mentioned above and borrowing moderately to prevent reducing cash on hand, thus maintaining proper preparation for an emergency. Moreover, you can use the as a deposit and make additional loans by using your own credit to make investments on multiple properties (leverage effect).

Loans: Good Investing

Even if you have sufficient money on hand, we think that loans should also be considered for safe and efficient asset management while making good use of your own credit. It is an ideal form investing to get a loan and use leverage while holding assets that can pay everything off if something were to happen.