Investment Support

Mortgage Advice: Home Equity Loans Can Finance an Investment Properties and Second Homes

The idea of owning investment real estate seems to be gaining popularity as investors are getting tired of the unreliable stock market. Many investors feel confident with real estate as a place to secure their future, believing that overall it will outperform cash, fixed interest deposits and other investments, particularly for the medium to long term. Second homes account for a full 40% of all homes sold in America. According to a recent annual report by the National Association of Realtors (NAR), 27.7% of all homes purchased in 2005 were investment properties and 12.2% were vacation homes.

If you are considering either an investment in income producing real estate or a vacation home, it is generally better to cash out the equity in your home rather than to move cash from other investments which are doing well for you. If you’ve been paying on your mortgage for more than five years and the interest rate is below market rate, a home equity loan would probably work better for you than a mortgage refinance. And, a home equity line of credit (HELOC) could be your best answer for your second home purchase or other real estate investment.

There are generally no closing costs with HELOCs, as opposed to home equity installment loans (HEILs). HELOCs typically have a lower interest rate than credit cards or installment loans, and they offer a lot of flexibility in features and payback options, including:

Interest-only loan payment option (based on prime rate1 + a fixed margin).
Choose to pay only the minimum, or pay down your balance and have it available for you to use again and again for on-going maintenance of the property.
10, 15, or 25-year terms available with the option to extend the equity line of credit, rather than having to apply for a new loan, if there is still an account balance at the end of the loan term.
Borrow up to 100% of property value and pay interest on only the amount you use.
Lines of credit from $20,000 up to $250,000.

A property portfolio can provide healthy long-term capital gains, appreciating assets and cash flow from rent to add to your retirement income. In addition, the interest paid on a home equity line of credit is generally fully deductible (up to a maximum of $100,000), provided the loan does not exceed the fair market value less the outstanding mortgage.

1 Prime rate is the rate published each day in The Wall Street Journal (but not the Weekend Edition of The Wall Street Journal).

Log cabins are generally low-maintenance houses since they are located in far out places and it is obviously not easy to get maintenance staff or equipment there. Log cabin plans tell the whole story. Most of the building material including the floor textures used in a log cabin requires very basic maintenance and it looks as good as new. The exterior of a log cabin has to face the natures wrath and thus is very simple to maintain.

However, some people might like to keep the interiors of the log cabin in a very good condition and might use professional maintenance and restoration services. These services provide detailed maintenance services for the log cabin and do not come cheap. Some of the steps of maintenance for a log cabin include staining of the interior and exterior wood, chinking repair and replacement, borate treatment to safeguard against pests, stay dry, chemical strip and cob blasting. Deck cleaning and sealing are also important since that is where most of the time of the log cabin residents is spent.

Log cabin plans should include inspection of the entire log cabin along with finishing of rough edges is part of the maintenance procedure. If you are a log cabin owner and rent it out on frequent occasions to holiday-makers then good maintenance will go a long way to fetch you an attractive rental income. Apart from that, the overall value of log cabins tends to be higher if they are well maintained and clean. A quick search online will provide you with details of a number of agencies who deal in maintenance services for log cabins. It is advisable that you narrow down your selection to a few companies in the region where your log cabin is situated and take comparative quotes for them for the maintenance requirement and then make a decision.

Well, were all reeling from our utility bills. So, what can be done to cut energy costs?

Obviously, the best way to cut your utility bill is to go with a non-utility company source of energy. Solar power can be used to warm your house, while geothermal can be used to cool and heat the home. While these are great choices, there are a few simple steps you can take to cut that monstrous utility bill.

Vent Covers In most homes, there are rooms that rarely get used. A very simple and very cheap way to cut your heating costs is to isolate those rooms from the rest of your home. To do this, you should close the vents in the room. The vents, however, rarely close well. To make the strategy effective, you should buy vent covers and place them over the vents. The covers are a form of plastic and keep heat from coming out of the vents. Next, close the door to the room in question and leave it. By using this strategy, you can effectively make your home smaller by excluding the square footage that has to be heated. The smaller the area, the small the amount of money to heat the home.

Windows Windows are the single biggest energy wasters in your home. Your windows must seal tightly. If they dont, heat will escape out of them causing your heater to fire up over and over. If you make sure your window fit tightly into the frame when closed, you can significant cut the utility bill. It sounds like a small thing, but it really ads up.

Programmable Thermostat Heating your home accounts for fifty percent of your utility bill. While a warm home is necessary for basic living in the winter, the home doesnt need to be heated all of the time. If there are periods during the day where nobody is home because of work or school, a programmable thermostat can be used to slash your heating costs. Simply program the thermostat to turn off during the relevant time and turn back on before anyone gets home. Cutting four to eight hours off of your heating needs each day will add up quickly on your utility bill.

If your utility bills are completely out of control, there is something fundamentally wrong with your home. You need to go ahead and get an Energy Audit. An auditor will come out and inspect your home. They can then identify the problem, what should be done and provide other tips to slash your bill. Depending on how bad your situation is, an energy audit can cut your utility bill by 50 percent or more.

Power costs are high and expected to continue to increase for the foreseeable future. Take steps to cut your utility bill now and youll reap the benefits for years.

Owning investment property is a tremendous wealth building strategy. Thousands upon thousands of individuals have amassed great wealth by investing in rental properties.

Unfortunately, few investment property owners learn how to leverage equity in a way that maximizes tax deductions while creating and locking in equity gains. Instead, they leave themselves open to price fluctuations in the residential property market. These fluctuations can wipe out or severely reduce equity positions in property.

Housing Boom To End?

There is little doubt we are coming to the end of a huge boom market in residential properties. For the last four years, properties have appreciated at unheard of rates. The question, of course, is what happens when the market cools off? Will we simply see a price plateau or an actual drop in prices? While nobody is sure, the clear consensus is property owners should move to preserve equity while they can.

Protecting Equity Gains

Protecting equity gains in your investment property requires careful planning. This leveraging strategy is fairly simple, but can sound complex. Please keep in mind this is just an introduction to the investment property tax strategy. You will need to contact us to learn more.

The investment property tax strategy protects your equity gains by separating and leveraging them. The leveraging process is best explained with an example.

Scenario 1 Without Tax Strategy

Assume you purchased a rental property in 1999 for $250,000 with nothing down. As of July 2005, the combination of loan payments and appreciation has resulted in a gain of $250,000. You have amassed wealth, but all of it is at risk. If prices drop twenty percent over the next year, you will lose $100,000 of your equity in the rental property.

Scenario 2 With Tax Strategy

We are going to use the same exact scenario. It is July 2005, you have $250,000 in rental property equity, but all of it is risk. You decide to implement the investment property tax strategy and the following occurs.

Our goal is to protect the $250,000 in gain on the rental property while also maximizing tax reductions. The first step is to refinance the property with, typically, an interest only loan. A percentage of the equity gain is taken out of the property and placed into an equity index insurance product. The equity percentage is arrived at by determining the payment amount you can afford on the loan. Typically, it is tailored to match your current loan payment amount.

Going back to our scenario, what happens if property prices pull back 20% over the next year? You do not suffer the loss of $100,000 because the gain is sitting in your equity index insurance product. Essentially, it is a wash and you have protected the capital gains while capturing a stock market-based rate of return.

Ah, but it gets better.

Equity Index Insurance

The investment grade insurance product isnt just any policy. Instead, the policy we use is tied to a stock market index. What if the stock market suffers a loss? Not to worry, this policy carries a guarantee that you will never lose a dollar, even if the market crashes. If the stock market did crash, the policy would simply credit you with nominal growth for the year in question. In all other years, the policy would grow with the stock market. On top of all of this, the money in the insurance product grows tax-free.

So, what has been accomplished? First, you have protected your rental property equity gains from home price fluctuations. Second, you have leveraged your equity into two growth channels, the stock market and appreciating house prices. Third, you have converted taxable growth [property appreciation] into tax-free growth [insurance].

With housing markets ready to cool down, this strategy effectively locks in your profits. Preserving equity gains should be a primary goal of any investment property owner.

Investment requires prudence. Whether the amount is small or big, you need to have complete information about the place or field where you are going to invest it. Investment is most often made with a purpose to accrue good returns in future. Investment is like a source of income where initially you put in some capital and expect it to multiply or boom in the near future. There are various types of investments nowadays and different strategies are associated with them. Investment can be in the field of property, land etc., in the stock market, in bank in the form of fixed deposits, in trusts and insurance policies.

When you move out to invest say for instance in property, the strategy of buy for low and sale for high prevails. In the language of investment this is called the arbitrage. What you require first of all is a perfect idea of the fluctuating market. When the market value is low, make as many purchases as possible. When the market as you assessed picks up pace, sell whatever you purchased at simply double the price. This profit however is not possible without a vigilant study of the market. An investor who has scrutinized the market from top to bottom predicts the highs and lows of market and makes purchases much before the onset of the profit season.

Arbitrageurs are very smart nowadays. In order to incur huge benefits, they even go about purchasing some very archaic piece of furniture or property from a low price market, invest a few more bucks in its renovation and then sell it in an expensive market or put it up at auction on the internet.

There are times when massive investments are being made in one area, this is known as the market bubble. Take for example, if a piece of land in a specific area is inviting too many buyers and that too with unbeatable profit, there is a horde of investors to purchase land in that area and sell it for the maximum possible. Similar is the case with the stocks of a company that is giving brilliant dividends to its stock holders, if the company lowers even a single dollar on its stock, multitude of people gratify their desire to receive excellent gains later.

Related to this is the value investment. Here the investor estimates the value of the company in the form of its returns. If a company has a good record with its shareholders and its shares are relatively at a lower price in the market, the investor will purchase maximum shares as possible since he is confident of the companys value. The investors basically peep through what is visible in this case. Many companies only flaunt to be successful in the market but actually they have been charged with many illicit proceedings. While there are companies that make a slow and simple start and scale new heights gradually. The investors are in search of these types of companies, the ones that are not feigning to be great.
An insight into the actual situation of the company prompts the investor to make judicious investments.

The risk factor is always lurking behind these investments. It could be a case that the buy low and sell high strategy does not work, that the market does not soar high as forecasted. In this case huge losses can meet your investments. It can also be a possibility that the stocks of the company that is deemed to be performing well, do not meet the expected surge in price or that the company rather than progressing starts retreating. So, the risks cannot be ignored at any cost and it is also a fact that the long term predictions about the market, company etc. might turn out to be true, short term ups and downs are reasonably difficult to foretell. So the financial advisors mostly speak the lingo of long term investments so as to ignore the short term impediments.

It is advised to take guidance from a good financial advisor before making any investment. For a colossal loss in investment is potent enough to ruin the entire life of the investor.

All of the planning in the world is an exercise in futility without the working capital to successfully carry out the plan. If a business sells to customers on terms, then working capital availability is dependent on cash flow timing. In most instances a business will incur a cash flow gap between the time cash is required for inventory, payroll and operating expenses, and the time cash is received from customers paying on terms. Lets explore a simple example of this timing difference that makes up the cash flow gap:

Day 1: Your business orders materials from suppliers on N/30 terms;
Day 3: Your business receives materials and begins production (which takes 5 days);
Day 8: Your business ships product to customers on N/30 terms;
Day 14: Mid month Payroll is due;
Day 30: Month-end Payroll and supplier invoice are due;
Day 48: Your customer remits payment to you.

In this scenario the cash gap is 34 days, which is from day 14 when payroll is due, to day 48 when customer remits payment. The cash gap encompasses two pay periods and a payment to your supplier, whereas the gap normally includes multiple payments to suppliers for ongoing customer orders. If your business is mature and growing conservatively, or less than 10% per year, then you probably have sufficient cash reserves or a bank line of credit to cover the cash gap. But, if you are a growing business with opportunity, how do you cover the cash gap? Oftentimes a bank line of credit is not sufficient to cover the cash gap for growing businesses because bankers look historically to your companys past to determine how much debt they will lend to your business in the future. Many growing businesses have found themselves caught short on working capital as their cash flow stretched during a period of growth.

Cash flow funding through account receivable factoring may be just the tool needed during periods of rapid growth. Factoring is not a loan or debt, but the selling of frozen assets (invoices) at a discount to obtain the cash in a more timely fashion (typically within 24 hours of invoicing your customer). Your business sends invoices to your customers and a copy of the invoice to the factoring company. The factoring company purchases the invoice from your company advancing 80% of the face amount of the invoice. When your customers pay the invoice, the factoring company remits to you the 20% reserved, less their fee (normally 1-5%).

In the cash gap scenario discussed above, working capital would be enhanced by providing your company with cash (80% of the invoice amount) on day 9! Your company would have cash flow to make payroll on day 14, and pay suppliers and make payroll on day 30. When your customer pays on day 48, the factoring company remits to you the 20% held less their fee.

When planning for growth in your business it is important that you assess the working capital needs and cash flow gap in order to ensure that your plans can be met. Utilizing an accounts receivable factoring program can assist in your successful growth. But, be sure to assess the cost of the accounts receivable program as a percentage of sales. And, make sure that you do not have a term contract with the factoring company so that you may exit the program whenever your business has grown to the next plateau.

Efficient allocation of the financial resources of a firm is an imperative necessity for the efficient functioning of a firm. The firms investment decisions involve decisions regarding long-term capital assets such as land, buildings, equipment and more. The investment on these assets is considered very important because it enables an organization to make profits. It, therefore, follows that the future development of a firm could, to a large extent, depend on effective selection of capital investment projects.

Capital budgeting is the process of making investments in capital expenditure. Capital expenditure refers to that expenditure the benefits of which are expected to be received over a period of time, especially exceeding one year. The chief characteristic of capital expenditure is that expenses are incurred all at one point in time, whereas the benefits are realized in the future. Capital expenditure decisions are also called long-term investment decisions.

Some of the examples of capital expenditure are cost of acquiring permanent and long-term assets like plants and machinery, cost of additions, expansions, improvement or alterations in fixed assets, and research and development costs. Capital budgeting implies the firms decision to invest its current funds most efficiently in the long-term activities, in anticipation of an expected flow of benefits over a long period of time. The long-term activities include: searching for new and more profitable investment proposals, investigating engineering/ marketing considerations and making economic analyses to determine the profit potential of investment proposals.

The decisions concerning capital budgeting are crucial because they are long-term oriented and irreversible in nature. The efficient running of a firm is reflected by the way decisions are made for the effective utilization of the firms financial resources. Such capital budgeting decisions are considered to be of paramount importance, because they can affect the working of a firm.

Perhaps you read this title and thought to yourself, how is this possible? Is it a trick? Let me assure you that it is not a trick. Indeed, it is very real. There is no scam. Its an age-old investing strategy called leverage. Leverage is using the right balance to use a little force to generate a big motion. Investment gurus have been doing it successfully for years in margin accounts to borrow stocks, make money on them, then sell them. The difference in price is their income.

But this is not a crazy investment scheme. Its a tried and true method of investing that youll feel completely at ease with.

If you own a home, you can get a secured loan to help you leverage the value of your home into a greater amount. Heres how.

When you bought your home, you paid a certain amount for it and although you have been enjoying it over the years, you (like many other people) probably hope that your home will increase in value so when you sell it youll make money. Who doesnt want to do that?

So heres where a secured loan comes in. A loan, when used to improve your home, can help you increase the value of it. And often, the overall value of your home increases at a greater rate than the amount of the loan! Thats great news. And thats leverage!

So you should get a secured loan and build that addition, put on a roof, get new windows, or give your house a paint job. Whatever you decide to do, youll be helping to increase the value of your home, which is an investment you can enjoy until you decide to sell.

And a secured loan lets you do that inexpensively. This is because a secured loan is a loan that uses the guarantee of an asset to help you secure a loan. When a lending institution is deciding whether or not to give you money, they look at the potential risk they will take. If you have nothing to offer them but your credit rating, the risk is higher than if you have a home, a car, some stock certificates, or some art. Anything of value will help them reduce the perceived risk they feel because they can potentially take the asset and earn back their money by selling it should you not be able to make payments.

So if you want to make money on your home, and most people do, you should consider getting a UK secured loan to help you leverage. Get the loan, improve your house, and sell it for a greater amount.

Prudence and a bit of luck can help investments grow quickly. There are a variety of investment opportunities available, and every day new ones keep popping up. There are certain basic principles which one can adhere to while making an investment decision. It doesn’t matter whether the investment is big or small; one must get complete information about the area where one wants to invest.

Investments serve different purposes for different persons in different circumstances. For some, it provides security for the future, while for others it is a financial instrument to earn good returns in short term. Generally, people invest in mutual funds, stocks, government and other securities, real estate and several other assets. A good investment portfolio has a mix of highly liquid and less liquid assets. It is also a mix of short-term and long-term investments.

There are companies and professionals which can advise you in terms of making investment decisions. There are also companies which are ready to make investments on your behalf. Some of them ensure a minimum rate of returns, while others do not. Before making an investment in any such company, be sure about its credentials.

If one doesn’t want to hire a company one can make investments individually also. But if you are a new investor avoid putting all your eggs in one basket. Make diversified investments instead.

After some time, when you start getting the returns, you would be able to decide about the kind of investment portfolio you will be comfortable with. If you are looking for long-term investments, it is always better to buy in a bear market, and sell in a bull market. Short-term securities or equity investments in the secondary market are more suited for short-term investments.

There are two kinds of capital: debt and equity. Both kinds are typically used by a company during its lifetime. Lenders have different objectives than investors and therefore look at different factors about a company when deciding whether or not to invest or make a loan.

Debt
Debt is money borrowed, which must be repaid at a set time period and generates income for the lender over that time period. Lending sources include not only banks, but also leasing companies, factoring companies and even individuals.

Lending sources look primarily at two factors: how risky the loan is; and whether the company can generate sufficient cash to pay the interest and repay the principal. The growth potential of the company is secondary; the primary considerations are the track record and asset base of the company. Usually the debt must be secured against the assets of the company and very commonly must also be secured against the assets of the owner of the company, also called a personal
guarantee.

Assets of the company are not usually given full book value in securing a loan. In other words, if your inventory has a book value of $50,000 (or it cost you $50,000 to produce that inventory) a lending source will only give you 50% to 75% of that value. The reason being is that the lending source is not in your business and would have to quickly liquidate the inventory, rather than selling it at market prices.

Accounts receivable, or money that is owed to you from customers who have previously purchased your product but not paid for it yet, are also discounted. Using the same example, $50,000 worth of accounts receivable may only be worth 60% to 70% of that value to the lending source. Customers may not pay the full amount owed, or feel they have to pay for the product at all, if an outside lending source is demanding payment. And so onwith equipment, land, buildings, furniture, fixtures and what ever other assets the company has, the same general rule applies.

The lender often requests that the personal assets of the owner of the company are pledged as a contingency and as a gesture of faith by the owner. Obviously, if the owner of the company does not believe in his/her own company’s ability to repay the loan, why should the lending source?

Equity
Equity capital is money given for a share of ownership of the company. Equity can be provided by individual investors, sometimes known as “angels”, venture capital companies, joint venture partners, and the sweat equity and capital contribution of the founders of the company. Equity providers are more interested in the growth potential of the company. Their objective is to invest an amount now and reap the rewards of a 5 to 1, or even 10 to 1, payoff in three to five years. In other words $100,000 now will be worth $1,000,000 in three years if invested in the right company.

Since the objectives of investors are different from lenders, the factors they evaluate in determining whether to invest are different from lending sources. Investors like to put money in companies that have the potential for rapid growth. Growth potential is based on the quality of management of the company, product brand strength, barriers of entry to competitors and size of the market for the product.

So Debt Or Equity Capital?
The answer is dependent on the answers to several questions: Why does the company require additional capital? What stage is the company at? What is the financial condition of the company? How much capital is required? What constraints will the financing source put on the day-to-day operations of the company? And finally, what impact will the financing source have on the ownership of the company?

Why Does The Company Require Additional Capital?
The reasons funds are required, or how they will be put to use, may lend themselves more to debt than to equity or vice versa. Debt is often a source of funds for the day-to-day operations of the company or to refinance a current loan. Expansion capital can be debt or equity. Start up funds most often come from equity sources. A turnaround situation, refinancing a delinquent loan, covering a deficit in revenues, could be either, but in these cases the financing will come with a high price.

What Stage Is The Company At?
Companies grow through several different stages: seed, start-up, first stage, and second stage. The stage of the company can be an indicator of the risk involved. While neither debt nor equity would be prohibited at any stage, the older and more established the company is, usually the less risky it is.

Seed Stage–the idea for a product or company is in the mind of the founder, but there is still substantial research and development necessary to determine whether the idea is viable.

Start-up–the company has a business plan, a defined product, and basic structure, but little or no revenues are being generated. The product may still be just a prototype.

First Stage–the product is either ready for market, or is generating some revenues. The structure of the company is in place.

Second Stage–full scale production. The company’s product has been selling and accepted by the marketplace. The company is ready for a major national introduction of the product or introduction of a second product.

Established–the company has been operating successfully for at least three years.

Turnaround– the company has been operating for a number of years but is underperforming. A hard turnaround refers to a company that is not only underperforming, but has been in a cash deficit position with little hope of returning to a positive position without major restructuring.

What Is The Financial Condition Of The Company?
In certain situations the company’s financial condition will suggest one kind of capital over the other. If the company needs all its cash to fund its growth, then a loan is not feasible, because the company could not afford interest and principal payments. If the company just needs a line of credit to fund a cyclical increase in orders, then it doesn’t make sense to bring in an equity investor.

A lender looks at the asset base to secure a loan, and the cash that has been generated to pay the interest. They also look at what other debt or liabilities the company has and very often the debts and liabilities of the owner(s). The old adage that it’s easiest to get a loan when you don’t need one is close to the truth. A strong balance sheet, top heavy on cash, and light on the side of liabilities is easier to finance.

Investors look at how healthy the company is by reviewing trends in the operating statements and the balance sheet. A company that has demonstrated a positive trend in the past is looked upon favorably. However, the future outlook for the company’s product and market is just as important to an investor as the past performance. A company with a somewhat shaky past in a currently booming industry is probably preferable to an equity investor than a great performance in the past in an industry that’s on the downslide.

But what if your company is a start-up and doesn’t have much, if any, history? Then other factors will be reviewed such as:

How much money the owners contributed to the company.

How strong is the management team.

How dedicated to success is the management team.

What other proprietary assets might be available such as patents, trademarks, goodwill, etc.

What barriers to entry to the marketplace are there?

While both debt and equity come at a price, the company must generate enough cash to repay the principal of the loan and the ongoing interest expense. Equity does not have to be repaid according to a fixed schedule. Equity investors are seeking long-term returns.

How Much Capital Is Required?
A small amount of capital required for a short time is not often an attractive situation to either traditional debt or equity sources. Lenders are not interested in loans that cost them as much in processing as in the income that can be generated. Investors feel that the due diligence required to fund a small amount of capital is nearly the same as that to fund a much larger amount.

On the other hand a very large amount of capital may only be obtainable if broken into stages that are funded based on achieving performance levels. For example: you have an idea for a diagnostic test that would be a medical breakthrough and revolutionize the treatment of all disease as we now know it. But you need $3.5 million to get the product ready to market. The initial funding may be as little as $50,000 to perform a literature and patent search to see if anyone else is working on the same idea and to determine the size of the market demand for the product. If the search shows that no one else is working on the idea, and the market is every doctor’s office worldwide, the second stage of $500,000 could be available to acquire lab equipment, hire lab technicians for six months, and hire consultants to develop a business and marketing plan. If the lab technicians develop a prototype test apparatus by the end of the six months, then $1,000,000 more could be available to develop a working prototype and patent it. When the working prototype is patented then $750,000 would be available to obtain FDA approval and independent tests.

What Constraints Will The Financing Source Put On The Day-To-Day Operations Of The Company?

You must consider how the financing source may limit the company’s operations. Loan covenants often restrict what the company can do with excess cash. They can also put limits on how much the company can spend, and on what type of expenditures, as well as demanding that the company maintain certain balances in their accounts, collect their receivable within certain limits, even determine the credit policies that the company extends to its customers. The company may not be able to take advantage of some opportunities because of these restrictions.

Equity investors can demand the same restrictions and in addition require that they have veto power in certain instances, or expenditure approval, even if they are in a minority ownership position.

What Impact Will The Financing Have On The Ownership Position?

The last issue and probably the most important one is, how will the owners react to having their ownership and management control diluted. An investor can often contribute experience and management expertise, as well as money, and has a vested interest in the success of your company. A lending source has no impact on the company (other than any loan covenants discussed above); its primary objective is to be repaid.

So Debt Or Equity? The choice is yours.