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How to Reduce the Risk in Real Estate Investing

By: Toni Laveri

When it comes to real estate investing, you need to protect yourself by limiting your risk. Despite the promise of high profit, if you're not careful, you stand to lose a lot more than you bargained for.

How can you protect your investment?

Know the real estate laws. It doesn't matter if you are a novice or a savvy investor, ignorance of the rights and regulations can put your investment at risk. You don't have to become an attorney, but you should be brush up on the laws that govern the market.

Stay informed with the health of the current economic market. Is the economy in general still improving? What is unemployment high? Did the rate of new home construction go up or down in the last five years? All of these variables are good indicators of whether property values will rise, level off, or even see a correction.

Consider putting down a large down payment when purchasing a property, at least 10%. Most novice investors might think that going with zero down loans is a great way to dive into real estate investing, but zero down loans are very risky. Putting down a large down payment will give you instant equity, reducing your interest rate. This will obviously reduce your cash on hand, but it will lower your risk and increase the capital of your investment.

Adjustable Rate Mortgages allow investors to purchase property with less cash and an attractively low relative rate. There are 1 year adjustable rate mortgages 5 year, even 7 year. this number is the length of time the low interest rate is good for. After this period, the lender adjusts the rate according to the current interest rate.

However, if you keep the property longer, that low rate can climb several percentage points. Unless you sell the property, or reduce the principle, you will be stuck paying high monthly payments.

As the adjustable rate mortgage goes up, property values are under pressure to level off or even decrease because of the rise in interest rates. Your investment gets hit twice. Of course, it's possible for rates to go down, but that's less common and refinance is usually toward a fixed rate, in those cases.

Taking a long term view will limit your risk. Invest as much as you can up front, make at least one extra payment per year, lean toward fixed rate mortgages of the minimum length you can afford. A 15 year mortgage pays down the principle quicker, so you spend less on interest, increases your equity rapidly, and usually carries a lower rate.

Playing it safe will ensure maximum return on your investment with minimal risk.

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