Understanding appropriate money leverage is the key to gratifying and beneficial real estate investment. For example, for every 1 percent difference increase in interest rate (5% to 6% as an example) a consumer loses 11% buying power. If the consumer could afford a $300,000 loan at 5%, they can only afford a $266,000 loan at 6%.
The Subprime bust, and subsequent Great Recession was largely set off by speculative real estate investments and over-leveraged buyers. Over the last 15 years, only 11% of all individuals choose to rent a single family home, a percentage that has not varied more than 1% in a decade and a half. Yet in 2006, four out of ten loans in the Western United States were for income properties (28%) or second homes (12%). Clearly, this was a broken system.
After the subprime fall, the mortgage world has tightened severely. Credit is tighter, documentation more extensive, contracts must be better written and appraisals evaluate a property’s present and forecast it’s appreciating (or depreciating) future.