Buying property through investment property loan has three key benefits:
1. It gives you immediate access to large amount of cash, which would have taken you years to save if you wanted to save that same amount of money from your monthly salary
2. Having the cash with you right now (as opposed to saving it over, say, a 10 year period) allows you to buy property at current prices and earn income on them over the life of the loan repayment period and beyond
3. The real estate investment loan you get from your mortgage or commercial bank could be as high as 3 to 5 times your equity contribution, depending on the bank you choose to use.
Securing an investment property loan to buy your next property gives you an opportunity to buy a higher priced property, which could mean buying in a better location that has the potential to deliver a higher return on your investment.
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Most banks (if not all) require what is called equity contribution from real estate investment loan applicants.
What is equity contribution?
Equity contribution is the percentage of the property investment loan which the loan applicant is expected to have in his or her account with the bank to qualify for consideration to receive the loan applied for.
In effect, the bank is saying, "Great, you want to buy a property and you need our support in that regard. So, how much are you contributing to this purchase?"
In simple words . . . your commitment to the purchase is shown by having a pre-determined percentage of the loan amount being applied for in your bank account.
So, what is the equity contribution percent?
The equity contribution charged by commercial banks in our part of the world is 20 to 30 percent of the investment property loan amount applied for by the loan applicant.
This means that if you're applying for a real estate investment loan of $100,000 dollars, you should have over $20,000 to $30,000 in your bank account.
Naturally, employees would love to get as much money as possible from their banks to finance their real estate investments.
But how much money is your bank willing to give you?
Remember that banks are custodians of other people's money.
Consequently, they are required by law to be prudent and ethical when it comes to approving loan applications, whether for personal or investment purposes.
One of such regulations you will encounter when applying for an investment property loan is the one that relates to the loan limit you qualify for.
In our part of the world, the size of loan the loan applicant qualifies for is dependent on:
1. The loan repayment period and
2. The monthly loan repayment amount that one-third of the applicant's salary can pay for
For example, if a real estate investment loan applicant earns $3,000 per month, then his monthly deductions towards the loan repayment (capital plus interest charges) cannot exceed $1,000 per month.
Suppose the loan repayment period is 10 years.
Therefore, the maximum investment property loan amount this particular applicant can be given is calculated as:
$1,000 x 12 months x 10 years = $120,000
Actually, the net loan amount the bank will approve for this particular loan applicant will be less than $120,000 because of interest charges, which also has to be paid for as part of the monthly loan repayment amount.
Banks are designed to be prudent with depositors' funds.
So, it is likely that your bank will not give you a loan that is beyond your ability to pay.
This retirement planning guide recommends that you take advantage of every investment property loan opportunity available to you to invest in real estate big time and buy multiple properties in different locations while still in paid employment.
This is essential for two key reasons:
1. You won't have access to those property loans again once you're retired and no longer have a monthly salary and
2. Real estate investments have the potential to pay all your bills during your retirement life. So, the more real estate investments you acquire during your working life, the more money will be available for you to spend after retirement.
Therefore, take real estate investing seriously!
The next article in this series outlines the steps for getting a real estate investment loan.
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