by J L Petriesan

Created on: March 04, 2008

The concept is called leverage, the use of debt to increase your earnings potential, and it is real, but not easy.

If you watch the late-night TV Infomercials, it would seem that anyone not making a killing in real estate is either lazy or a moron or both.

You've seen the ads. Buy real estate with no money down, often putting cash in your pocket at closing, renting it out, eventually selling it and cleaning up. There are pictures of mansions and yachts and very expensive vacations and "testimonials" of people who have "followed the formula".

There is an old canard: if it seems too good to be true, it probably is.

Here's the thing: if you have a friendly real estate agent and banker, yeah, some of the things they talk about are possible. Not likely, but possible. Well, they used to be anyway, but what with the mortgage crisis, those kinds of loans may be difficult to come by.

There is a big difference between investment real estate loans and loans for structures in which the borrower resides. Typically, you cannot get the 97% (or even 100%) loans on investment real estate. Sure, you could, I suppose, not tell the total truth on the loan application and assert you are going to occupy the place, but I cannot and will not advise that. It is wrong. Period. If you make it work for you and can live with it, well, that's you.

A typical investment real estate loan requires a 20% down payment based on the lesser of fair market value or purchase price. If you find a property appraised at, say $300,000 and you can buy it for $200,000, don't expect to be able to borrow $240,000 ($300,000 X 80% = $240,000). You will most likely have to cough up a minimum of $40,000 to buy the house. And because it does not have a rental history, you will not be able to count the income on it in computing your ability-to-pay formulas required to get the loan, so you have to have other sources of income sufficient to cover the monthly nut for at least a year.

Can you just "assume the payments"? Someone is willing to toss you the keys if you will just pick up the payment. Nirvana, right? Well, not really. There are all sorts of legal issues involved, which are above my head.

But, using debt in real estate is one of the better types of debt. Let's not discuss mortgages on personal residences. You should have one of these before you think of investing in other real estate.

Real estate is boring, right? Low annual returns because houses don't increase in value over the long haul much more than 5% (there

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