Property Financing Options for Real Estate Investments

Options to Consider When Buying Investment Property

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As foreclosures continue to increase and real estate prices continue to level off or, in some cases, plunge, laying down money on a real estate investment can feel like a double-edged sword. While real estate has historically been an attractive and rewarding investment, the term "froth" that Alan Greenspan, the former Federal Reserve chairman, used to describe the housing market in 20051 has spilled over into a less subtle, more worrisome situation that threatens to send millions of homeowners into foreclosure via mortgage default.

Of course, in a capitalist society, one person's economic misfortune usually becomes another person's economic gain, and the current real estate market is no different. For a savvy real estate investor, the subprime mortgage crisis and the resulting credit crunch still offer a number of opportunities for making money via foreclosure investing — or simply buying a vacation home at an attractive price.

What sorts of real estate investment options are available?

The same investment opportunities that exist in a strong real estate market also exist in a weak market, particularly when it comes to foreclosure investing, but the upsides and downsides are a little bit different:

Flipping homes. In a strong real estate market, your initial investment price would typically be higher, but so would the return on your investment. In today's soft market, you can find very attractive homes for less than their highest established market value, especially from "distressed" or "motivated" sellers (i.e., people who are facing foreclosure). However, you may not be able to sell these properties for the price you want unless and until you ride out the current downturn in the market.

Purchasing rental properties. Again, the purchase prices for rental properties are likely to be as affordable as they've been in recent years, but you'll need to do some in-depth research to ensure that your rental property retains its investment value during today's swoon. In particular, you'll want to make sure you can rent your units at prices high enough to cover your financing costs (plus a little profit), which requires extensive knowledge of the rental market in your chosen area. You'll also need to screen prospective tenants diligently to keep an eye out for applicants with bad credit. Home financing rates from lending institutions will depend on your credit report and credit score, but your ability to pay off your financing will probably depend on your tenants' making their rent payments every month. As the credit crunch continues, economic woes may very well extend deeper into the U.S. economy, which could weaken your tenants' finances down the road.

Buying a vacation home. Assuming you have the wherewithal to afford a second home, a vacation home may be your safest option during the current housing slowdown, since vacation homes are usually long-term investments. As such, you don't have to worry about finding prospective buyers any time soon or even screening tenants (unless you plan to rent the home when you're not using it). And if your credit history is strong, vacation home financing should still be available at fairly attractive rates. Since it is a vacation home, though, you might want to pay even closer attention to its location: Is it in a spot where you want to spend multiple vacations? Is it close enough to allow you quick, affordable getaways? Is the area's local economy strong? Are there reliable caretakers and/or contractors in the area who can help you maintain the home (and its long-term value) when you're not there?

In today's market, the chance to make money on real estate investments is very real, particularly in foreclosure investing. These opportunities typically go to those with solid financial assets and strong credit histories, though, so you'll want to be sure that your own finances are in order before you start taking advantage of any great deals you see.

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