Investing in Real Estate: Ways to Finance a New Home

As the 45th President of the USA, Donald Trump might not be the most popular person on the planet right now. However, the President is also a Real Estate mogul and understands the benefits of investing in real estate. In a nutshell, purchasing property as part of your investment portfolio is a tangible way of ensuring that your portfolio will continue increasing in value long after you pass away.

Real Estate as an Investment

James Kimmons accurately states in his article titled “Why Should I Invest in Real Estate?” that real estate has the potential to provide better returns when compared to other types of investments. He notes that “for most of the 1990s, the Standard & Poor’s Index posted earning yields of 5 to 6 percent on average. At the same time, the S&P’s dividend yields were only around 2 percent or less.” It’s hard to argue with a 5 to 6% earnings yield versus a 2% return.

Furthermore, real estate investments provide monthly rental which will offset the cost of the mortgage taken out to purchase the property. They also appreciate in line with inflation as well as provide an inflation-proof investment. In other words, because your monthly rentals usually increase the same amount as inflation, you will never lose any inflation-related income.

Financing your new home

When you are investing in property, I believe it is important to consider the most cost-effective way to finance a home as well as taking into account the most efficient way to make your money work for you. Therefore, here are several ways to fund the purchase of your new property:

Traditional mortgage

A mortgage from a conventional bank is probably the easiest and most common way of funding your new property. To apply for a traditional mortgage, you need to comply with the bank’s application requirements such as a minimum credit rating and a deposit of a certain percentage of the total loan, amongst other conditions. Should you meet all of the bank’s terms, your mortgage application will be successful, and you will be able to purchase the applicable property.

FHA insured loan

The Federal Housing Association provides loan insurance for mortgage brokers. Because of this insurance, lenders or mortgage brokers are able to “offer FHA loans at attractive interest rates and with less stringent and more flexible qualification requirements.”

Family loans

An alternative source of funding which can benefit both parties is a family loan. For example, if your parents have money that they would normally invest in a savings account of sorts, it might worth their while lending the money to you. This money will then accrue more interest that it would in a savings account. Furthermore, you would save on interest by borrowing this money.

VA loan

If you are a military veteran, you are eligible to apply for a mortgage from the Veterans’ Association. The aim of this loan is to provide long-term financing to military veterans and their surviving spouses. The VA loan is structured in a similar manner to the FHA loan, where a traditional mortgage broker provides the credit, and the VA guarantees a portion of the loan; thus, allowing the lender to give you beneficial rates.

Cash payment

Should you have the total purchase price saved in cash, you can pay for the property in cash. A cash purchase will often garner a better price for the house than if you apply for a mortgage. The simple reason is that the seller will receive the money for the house quicker than if you were to apply for a mortgage.

Securities-based mortgage

Instead of applying for a standard mortgage, you can choose to use a portion of your stock portfolio as collateral for the loan. In other words, the lender will take the shares that you have invested in as a guarantee for the loan. You will then only pay interest on the loan amount. Once the loan term is up, you have the option of selling the shares to pay for the loan, or you can pay the capital amount and retain your stock portfolio as it was before the purchase of your property.

There is more than one way to finance a home. All you need to do is decide which one is the most cost-effective option for you.