Financing in a period of high interest rates
# Entrepreneurs of the week - Amitai Kenrik, Lior Stein and David Pat
# Post # 6
Hello again.
Still watching and enjoying? What fun we have to give some value…
Today we will talk a little about financing and what you should be careful about in days of high interest rates.
The world of available money will have a limited resource. We meet a lot of investors who want to make deals and say they do not have enough money to make the deal, while in fact they have a variety of financing options that they are not aware of.
There are many options in financing, that if you know how to examine them correctly and use them correctly, you can simply make money that makes us more money or in other words - leverage.
Ummm, there are some barriers that cause investors to reject funding due to incorrect analysis, so let's try to open your mind.. and if you still left this post confused, you probably need to talk to the experts?.
The first barrier we always check is the interest rate. So to neutralize this barrier, let's start with the question:
If you were told you could get a high-interest loan (for example, 10% per annum) how would you react? Are you taking out a loan?
Let me tell you what I would do
Checking the numbers!
This is a somewhat vague answer so let's explain:
For me the question that needs to be asked is what am I going to do with the money and not what is the interest rate (although we always strive to get financing as cheap as possible) that is, if the financing costs me 10% a year and my profit is higher in the expected investment, I can be in a good place .
but…
Another question is what level of risk I take for the profit I anticipate and whether that risk is worth the high funding.
Once I am able to answer these 2 questions, my ability to decide on the viability of the deal and the cost of money becomes easier.
In risk management there is another parameter that needs to be taken into account and that is time - the longer the loan time the longer the lender's exposure and therefore the more money will cost.
A second barrier that exists is that people do not calculate correctly the interest they will pay.
And it is impossible without an example:
The bank offers you a loan of K $ 100 at an interest rate of 5% for 5 years.
What is the accrued interest you will pay at the end of the 60 months?
If you have an interest rate of K $ 25 (5% * 5 years) it sounds reasonable but just not true.
The cumulative interest rate will be a little more than K $ 13 (feel free to check the Spitzer board…) and do not go into further explanations because we are not in a financing course.
It turns out that the monthly repayment on such a loan will be a little less than $ 1,900 per month (principal + interest).
So, if I go into an investment that will yield me a 4% annual return (when I know I intend to invest over time), then even though the monthly repayment on the loan, higher than the monthly income from the investment, still pays off - I can get $ 20K from a 4% calculation X five years and the payment on the loan will be $ 13K so we will have a net profit of $ 7K (assuming the risk is low and we have the ability to meet the monthly repayment). Remember, the real profit will come after five years, when we finish the loan and enjoy 100% of the income and that 'even before we started talking about the increase in the value of the property ..
So let's try to summarize what we said.
Before I go into investing I always ask myself what is the level of risk versus profit potential and no less important is how long the investment lasts to estimate the average return relative to the interest rate on the loan.
Wait, but now that interest rates are rising is it right to get into loans?
In recent times, interest rates have risen quite a bit. And according to experts, interest rates are still expected to rise and much more. Therefore, it is natural to ask: Is it right to take out a loan now? Which loan should you take? What is the right level of leverage for me?
Of course we return to the starting point again - depending on what I invest in (expected return) and how much risk there is in the investment.
A loan in Israel or the United States?
If a year ago interest rates in the US were cheap, then today the interest rates there are expensive and financing in Israel can be no less attractive than in the US (and perhaps in the future to refinance in the US when interest rates fell).
When we come to explore financing options in the country, we need to keep in mind that there are lots of financial tools that can help us:
An all-purpose loan from the bank.
2. Mortgage turnover.
3. Low-interest loan at the expense of a study fund, savings fund, provident fund and more.
In conclusion,
It is worth remembering that real estate is a business that is invested in over time and it is always possible to change the financial plan according to data and time.
When interest rates are high, the monthly payment increases and the personal cash flow decreases, so the monthly repayment and cash flow capability must be tested and proper safety coefficients taken by performing cash flow simulations.
As far as I know, no one has gone bankrupt in real estate when it is not leveraged. That is to say, whoever buys on time, lowers his level of risk (still may not earn or earn less, but do not go bankrupt…).
On the other hand, the ability to increase capital and earn more (or get rich with a less laundered word) is done by leverage and exposure.
But the end of an act in thought first…
One has to plan properly, understand the risks, the appropriate level of leverage and examine the cash flow. Only then will we be able to make optimal decisions regarding our investments.
This is a complex area, so if we killed you today we are here for any question ..
Of course we will be happy for comments, questions and additions.
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