With the recent comments of the FOMC, the Federal Open Market Committee, and the consensus that the economic recovery will be prolonged, borrowing rates will be extremely low (due to the federal funds rate / monetary policy). Couple that with the downward pressure on home prices due to poor macro fundamentals (like over-supply (supply and demand) and high unemployment) and you have great conditions for real estate investing and a tough environment for other investment platforms. Cheap borrowing costs and downward pressure on house prices maximizes the effect of leverage in real estate investing.
* leverage is the use of borrowed funds to maximize equity returns in real estate. Equity returns are the return on the cash you put into a property.
* Borrowing costs are a major part of the analysis associated with real estate investing. A cheaper mortgage will allow increased cash flows. Assuming a fixed rate mortgage; inflation and market fundamentals should push rents higher and this increases the difference between cash flows and mortgage payments that remain the same over the term of the loan. Also maximizing leverage allows the borrower to gain equity through appreciation of the property.
* There are downside risks to investing in any case and investing decisions should encompass much more then only considering borrowing costs and prices. For the purpose of commenting on the FOMC article I have limited my discussion.
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Real Estate Calculator Suite
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