Despite massive rate cuts by the FED it seems quite clear that nothing
is likely to stop the massive free fall in housing prices.   foreclosures exploded
in February increasing 60% over the same month a year ago.

The underlying problem of the current credit crisis around the world is US
housing prices.   Despite radical steps taken by the FED and the Treasury
it seems hard to believe the problems will go away until the fundamental problem
is resolved.

What’s the fundamental problem? one might ask.

Housing prices.  If housing prices don’t bottom then nothing else can.  Since so
much of the economic growth of the last 6 years has been housing driven (and
based upon growth of credit/debt) nothing can truly settle down until housing
prices stabilize.   Who knows when that might happen.   It seems to me, people
are just catching on to the problem and that despite the ranting and raving of those
on wall street, there’s been no wide spread panic among consumers.

Without deep panic or “contrition” of the market, it’s hard to believe we’re anywhere
near a bottom in housing prices (despite what your realtor might be telling you).
Naturally, some markets are further along in the correction cycle than others, but
it still seems to me that the bottom is not quite visible on the 6-12 month horizon.

Despite this fact, there are real opportunities in the market right now.   Some sellers
are really hurting and willing to sell for far less than what they once thought the home
was worth (good news for real estate investors).   In addition there are big opportunities
in foreclosures as banks need desperately to improve their balance sheets are are willing
to let the homes go at a substantial loss.

So as always, do your homework on each property you look, but it seems clear it’s going
to be a buyers market throughout 2008!

The secret in real estate business is to use other people’s money. This is how most real estate tycoons are made. Unlike traditional residential real estate mortgages, real estate financing offers much broader financial options, including lending or financing from various financial institutions. Transactions like these call for above-average negotiation skills.

It’s not advisable to invest your own money in a real estate as for a few very important reasons. First, you you tend to give most of your profits away by not leveraging your investment. Second, real estate is a very risky business – you don’t want to jeopardize everything you have.

This is not to say that real estate investment is all about losses. On the contrary. if you know how to make money work for you, you may actually garner a great deal of money in return for your investment.

Here’s how:

If, for example, you purchase a $100,000 property that increases an average of 7 percent per year (in reality that number could be higher or lower), you would see a net profit from renting your property resulting in an approximately 15 percent return.

If you’re content with little return of investment, you might settle with your 15 percent return. But if you really want to earn on your investment, consider the possibility of what leveraging can do for you. At present, a typical real estate investor can find financing as high as 95 to 97 percent of the purchase price. There even some instances where you may be able to get a 100 percent financing but we won’t use this for our example as it’s an inadequate comparison.

So, if you’re are an investor who is already content with a smallreturn of investment then 15 percent sounds like a lot. But for those who really want to make it big in the real estate, 15 percent is far from being considered a noteworthy return.

How does leveraging work?

Let’s assume that the rental income will cover all your expenses, including the mortgage payments. Taking the same example, a 7 percent appreciation of your property results in a $7,000 profit per year. With a 95% financing in place, you’ll be able to get a $7,000 return on $5,000 (your 5 percent down payment on a $100,000 real estate property). This will provide you with a 140 percent return on your investment. Not only that, with the same $100,000 you can go out and purchase 20 investment properties, finance 95% percent of them, and make an amazing $140,000 profit a year. This totally beats the $15,000 profit with an all-cash transaction.

In terms of the additional 20 properties, expect to have a hard time getting financing for them since usually only five or six new rental property mortgages are the maximum that lenders presently allow. Which is why you need to have an above-average negotiation skills.

By Stu Pearson