Purchasing Real Estate Part II

Besides figuring out what to purchase and when, the most important factor is how to pay for it. As each of those properties is usually mortgaged, the financial commitment should be commensurate with the time spent there. I speak from experience as I worked with a person who spent close to 2 million dollars on a residence, never spent one night in it, and 12 months later decided to spend 3 millions dollars on a pied-a-terre in a different city. It took us a few days to realize that they also intended to keep the first residence. As this anecdote reveals, the numbers themselves need to make sense. It may be acceptable to have a million-dollar primary residence and secondary residence, but the same would not apply to a vacation home or a gift to a relative. Even with a 20% down payment, a multi-million dollar property costs about $4 to $5,000 a month per million. When the mortgage payments start compounding, the clients may not realize that their liabilities can easily range in the tens of thousands monthly. The key is that payments need to be sustainable past the peak of one’s career. $40,000 a month may be manageable now, but not so much 6-7 years down the road once the income stream has considerably dwindled.

Caution should be used when getting in the realm of a multi-property portfolio as serious long-term planning should be undertaken and properties incrementally added as the financial situation of the individual is solidified. In other words, the real estate holdings should not represent an excessive percentage of an individual’s Assets. Best practices include substantial down payments (20-25%) and aggressive paydowns or payoffs whenever possible. Such actions actually reduce the mortgage payments, and create savings in the form of accumulated equity. That equity can be tapped in the form of an equity line of credit even if one is not needed. Experience proved that it is better to obtain credit when things are going well. Banks hesitate to give loans to people already in distress.

The truth of the matter is, Real Estate is still the most tangible investment one can make, but it is also the most emotional one. Each purchase should be approached in a level-headed manner and with the help of a professional.