Real Estate Investment

Real Estate can be an investment instrument. Real Estate that can generate income works as investment income. Apartment houses, warehouses, farm land, and other kinds of income producing real estate are investment instruments.

Your house is not an investment instrument.

When a real estate broker or mortgage banker tells you that you don't have to worry about finance costs of buying a house becuase it's just an investment that will increase in value and the appreciation in value will magically take care of all those nitty gritty mortgage finance problems you need to pack up your papers and run. Stay far, far away from those people.

Your home is a place to live. It has maintenance costs attached. It does not generate income. It is not an investment.

Double Blind has a nice post explaining this idea.

Looking at Your Mortgage Options - down payment (first step)

The first thing to think of when considering a loan for a home mortgage is the size of the down payment. How much cash can do you have that's available for long term investment in the home?

The standard is twenty percent of the purchase price of the home. If you have a twenty percent down payment (and a decent credit history) you'll be in the driver's seat regarding interest rates, terms, and other options of the mortgage. You'll be able to get a mortgage without that large a down payment, you just won't get one with terms as favorable as you'll be able to get with theat 20 percent downpayment for your home mortgage loan.

The first step in developing your options for a home purchase is to simply add up the cash you have available for a down payment. Multiply by 4. That's how much house you can afford. I'm not suggesting 5 because it's a mistake to use all the money you have available for that twenty percent down payment. You're going to need cash in reserve for unanticapated purchase expenses, move expenses, and other contingencies. So leave yourself some slack by muliplication by 4. That means you'll have an extra 5 percent of the purchase price as a cushion.

Keeping some slack in your estimates is a key factor in making sound financial plans. Always leave yourself some room.

If that amount of money (the cash you have available for a down payment times 4) will buy you enough of a house for your needs then you're in great shape as far as ability to obtain mortgage financing for your new home. Go find yourself a house.

If not, then your mortage options might be more restrictive. In the next post I'll look at a ten percent down payment.