Risk and an Investor Loan

There are a number of ways one can infuse capital into real estate investing. One of the most common ways is to seek an investor loan. Portfolio loans and traditional mortgages are the most common ways of procuring such capital.

But, what is an investor loan?

Basically, it is a loan provided to purchase residential or commercial real estate. Then, the property is sold (flipped) at a profit. This method of investing is among the oldest and most reliable form of investing. Yet, there are those that oppose seeking an investment loan.

Some reasons some are adverse to an investor loan make sense. If they borrow money on a property and the value declines, they will suffer a net loss and not a net gain. This is the unfortunate possibility that many may face when attempting to flip properties. However, there is no reason to fear the risk involved with such a venture. Many times, such fear is completely unfounded.

So, is an investor loan always a risky proposition? Honestly, the employment of the word “always” would be an interjection of fallacy in logic. In other words, there are instances where an investor loan is risky and other instances where the loan would be less risky. (It would be intellectually dishonest to refer to any investment opportunity as a no risk proposition) Ultimately, the decision to borrow money for investment purposes needs to be weighed deliberately. However, it should never be considered a strategy to completely disregard either.

Sometimes, it is necessary to diffuse risk when acquiring an investor loan. This is a benefit that can be achieved through portfolio loans that facilitate the purchase of many properties. Specifically, the various purchases can be used to cross collateralize risk. That is, the increased value of one property can offset losses in another property.

For example, portfolio loans can be used to purchase two properties. Both properties cost the same amount of money to purchase. One home loses 10% of its equity and the other property gains a 21% increase in equity. When you combine the profits and losses of both properties, you end up with a 1% gain. Granted, a 1% gain is not a huge amount of money but it is much better than a loss.

Again, this type of cross collateralization can make an investor loan much less riskier than it would be when placing all assets into one purchase. Yes, risk will always be a part of real estate investing but there are no reasons to worry. There are many ways one can diffuse the risk. Cross collateralization is one method among many.

Really, as long as your investment strategy is a sound one, the odds of success increase. Yes, there no guarantees in any form of investing, but there are decidedly smart strategies one can employ. This does not guarantee success, but it does dramatically increase the odds of it.

by Susan Lassiter-Lyons - April 14, 2009

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Source: http://www.portfolioloanblueprint.com