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Investing in Real Estate - With Risk Comes Reward

By Brian Kline | March 26, 2014

With limited knowledge that the real estate market has tanked over the last several years, you might be hesitant to pull the trigger to make what should be an excellent investment today. With some fortitude and patience, today is likely the best opportunity you'll have in your lifetime to make a hefty profit from a real estate investment. Generally, your options are to either rent out your investment or flip it. This article focuses on flipping properties.

Consider Your Risks

Adjustable rate mortgages were a huge problem in the real estate melt down a few years ago. Still, today some investors are going back to adjustable mortgages as a less expensive source of finances for flipping properties. Adjustable rate mortgages are being advertised as low as 2.6%. However, the national average for adjustable mortgages is hovering around 4.2% at this time. There are two general categories of adjustable mortgages. Each comes with its own risk and reward. Each adjustable mortgage is attached to a third party index that determines the current interest rate. Also, each adjustable mortgage has a margin above the index that must also be paid.

© Dmitry -

© Dmitry -

One general category is tied to an index that moves slowly, meaning your interest rate will go up or down slowly. However, the margin that you pay above the index will be higher. The other general category attaches the adjustable mortgage to an index that fluctuates much more often, commonly on a monthly basis. The reward is that the margin paid above the index is less. The risk is that your payment fluctuates much more.

Because your reward is reflected in the risk you take, be aware of some of the traps these adjustable rate mortgages come with:

·         Your payment could go up (a lot) even if interest rates don't go up very much.

·         Your payment may not go down much even when interest rates go down.

·         There are several scenarios built into these loans where you end up owing more than you borrowed even when you make all of the payments on time.

·         Adjustable mortgages often have a built in penalty if you pay them off early - not good when you are flipping houses.

Consider a 15 Year Fixed

I think you can be sure that the super low adjustable mortgage rate will have built in advantages for the lender. They will make their money one way or another. Your financing decision needs to be made based on how much you can afford to pay each month. Besides an adjustable mortgage, you want to consider a 30 year fixed mortgage and a 15 year fixed mortgage.

The 30 year fixed mortgage will have lower payment because it is spread out over a longer time period. However, 15 year fixed mortgages have a lower interest rate than both adjustable mortgage rates and 30 year mortgages. This makes the 15 year mortgage the most attractive if you can afford the higher monthly payment.

Today's 30 year mortgages are averaging around 4.85%. Your monthly payment will be around $528 (not including insurance and property tax). If you can complete the flip in six months, the total interest you'll pay is $2,417.48. Today, the national average for 15 year fixed mortgages is about 3.98%. Going with this loan gives you a monthly payment of about $739 (not including insurance and property tax). If you complete this flip in six months, the total interest you pay is $1,969.66. That's a $ 447.82 savings over the 30 year mortgage.

Flipping houses is a business and you should be looking to cut expenses anywhere you can. With average 15 year mortgages lower than the average adjustable mortgage and with a lower risk, the 15 year mortgage looks the most attractive today. However, read the fine print of any mortgage carefully so you understand the risk to reward equation.

Please leave a comment if this article was helpful or if you have a question.

PhotoAuthor bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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