Manage Your Exposure Managing the risk associated with investing in real estate is the key to protecting yourself from loss. The most important aspect of risk management in real estate is to know the law. It’s essential that you have a working knowledge of the real estate legal structure and requirements. After you’ve researched property availability, cost, and buyer interest, you’ll need to hypothesize about what the future holds for your market. Will prices go up or down?
When considering your risk, keep the following points in mind:
1. Think about the local economy. Are there jobs available or are most companies in the area losing jobs? Are new homes being built more or less than over the past 5 years?
2. Make wise financing choices. When picking your funding source, think about how long you plan to keep the property. Adjustable Rate Mortgages (ARMs) are attractive because of their lower down payments and lower rates. You can pick the duration of the loan – typically either 1,5, or 7-year ARMs – and your rate will be adjusted to the prevailing rates after this period of time. If you plan to hold onto a property longer than the ARM, ARMs can cost you more because of the higher interest rates. It may be more prudent to opt for a fixed-rate mortgage with the shortest length you can handle financially.
3. Pay a large down payment to reduce your risk. If you can put down 10%, you’ll have instant equity in the property, and most likely get a better interest rate.
4. Be creative with your mortgage payments. Make larger monthly payments then require, or make one extra payment a year you’ll reduce your principle.