How To Avoid Negative Equity In Real Estate Investment Financing

Real Estate Investment Financing is simply industry jargon for a real estate investment loan. In a bad property market where rental yields are low, the most dreaded word that you can say to a real estate investor is negative equity. So what is negative equity? It is a situation which arises when the foreclosed value of your property is less than the price that you paid for it and in certain states like in New York, the mortgagee (the bank) can then bring a deficiency action against the owner to reclaim the difference.

This article will therefore go on to examine three ways to prevent a negative equity situation in the longer term.

The first key to preventing yourself from a negative equity situation is always look at the downside of any investment and analyze the rental yield of your property in a bad year. In real estate investment terms, this means that you look at the average rental yields of your property in the lean years to see if it drops below your monthly instalment for your mortgage repayment. I hate guessing, so the best way is to go to a real estate agent and ask them to generate a graph and then do your own analysis to see if your property rental would go below the amount that you are paying for your monthly mortgage instalment.

The second factor to consider is the price that you pay and the monthly instalments. Many people during a property boom, tend to overpay for their property and as a result, when the economy turns around, the changes of a negative equity situation arising is quite possible. Excessive exuberance in the real estate market like in the stock market can make you more likely to buy the property at an all time high.

The third factor is the rebound of a sector. Spend some time looking at statistical data. Which property sectors rebound more quickly than others in response to a good market and economy? By choosing your property investment right, even if the market is bad, your chances of a turnaround are better than the national average. This is also an application of the common adage of “making the best of a bad situation” in real estate investing.

In conclusion, by spending some time to consider the three above contributing factors and spending some time to analyze a property investment can save you much heartache later and prevent you from falling into a negative equity Real Estate Investment Financing situation.

Copyright © 2006 Joel Teo. All rights reserved. (You may publish this article in its entirety with the following author's information with live links only.)

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