What makes a GOOD Mortgage Investment? One that returns ALL of your principal and all of your interest as agreed. The best way to insure this happens is to make sure there is plenty of equity to protect your position.
Why do you have to have plenty of equity? Because if you continually invest in mortgages, sooner or later you are going to buy a mortgage in which the person making the payments stops paying. This can be a payer that you thoroughly checked out before you bought the mortgage and he checked out great. Excellent pay history, excellent credit, good job, etc. However, things happen. People die, get sick, lose their job, etc. If you buy many mortgages it can and probably will happen.
When you look at a mortgage to buy, you have to assume that you may end up owning the property that secures the mortgage. A question you must be able to answer BEFORE you buy the mortgage is: “If I have to foreclose on this mortgage, is there enough equity in the property that I can be reasonably sure that I can get my investment back?”
To analyze this potential investment you need to consider:
“How much is the maximum investment in this given mortgage you can make in relationship to the value of the property?
Some “general” rules used by different investors have been:
“Do not invest more than 70% to 75% of the value of the property. This is a GENERAL rule. You have to develop your own criteria based on your Real Estate marketplace.”
You have to take into consideration how much it will cost you, above your investment, to sell the foreclosed property. Such as: “What are comparable properties selling for in the area where the subject is located?”
This is one of the reasons why it is very important to have a professional appraisal done BEFORE you buy the mortgage. If you do have to take the property there may be repairs needed before you can sell the property again. When you do sell the property there may be sales cost to pay, back taxes, etc.
What I have found some mortgage investors do if they have to foreclose is to get the house ready for sale, then agree to finance it for a new buyer. This makes sense since the investor is already investing in mortgages. This allows the investor to get a TOP DOLLAR price (because many people who can’t qualify for a conventional loan are looking for a home to buy). It also allows the investor to more thoroughly check out and qualify the new buyer.
I have not intended in this article to scare anyone away from investing in mortgages; however, one needs to know some of the pitfalls and bad things that can happen. If one knows bad things can happen, they can prepare for it.
As stated in a previous article, I restate that mortgage investing can be one of the most lucrative investments one can make, and safe if the investor does proper due diligence.
These posts are the opinion of the author who is not engaged in rendering legal, accounting, or investment advice. If such advice is required or desired, the services of competent professional persons should be sought.
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