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I have a friend who's been doing this. Some things that confuse me, if anybody can shed light: 1. Do other developed countries allow 20x leverage on cash to bu

I have a friend who's been doing this. Some things that confuse me, if anybody can shed light: 1. Do other developed countries allow 20x leverage on cash to buy homes? 2. It seems like most real estate investors aren't pursuing commercial loans, but instead are using personal home-loans. Is there any regulation of this? ("Oh, I intended to live there, but then something happened") 3. How can banks afford to give out loans at interest rates that are less than inflation? Is this due to Federal Reserve rates, and if so - do other developed countries maintain such low interest rates + tax benefits for home purchases? It seems like the US government is propping up this entire industry, rather than letting a free market operate.

serjester 4y ago
I'm going to qualify this with I'm not an expert but I do have some familiarity with the space. 1. While possible, loans where you put less than 20% down are tied to very high interest rates. Most people I know in the space avoid these or quickly refinance once the cash is available. 2. Commercial loans are difficult to get for an individual investor. If you're purchasing residential housing these aren't practical. 3. Banks interest rates are only tied to the federal interest rate.
hsuduebc2 4y ago
1). Yes they do. Some even loan you 110% (Netherland..) of property value but mostly they loan you around 80%-90% of price. Usually bigger leverage means bigger interest. 2. Not really and honestly banks usually don't care if you pay in time. 3. Now I'm talking from experience as resident of some European country. When you are giving a loan to someone to purchase a property as a bank you are not loaning your own money. You loan this money usually from central bank and then "re-loan" it for higher interest to customer. Most of the mortgages in Europe are with fixed interest for some period therefore inflation doesn't really bothers you because bank loaned this money from central bank in times where you get the mortgage when interests were low.
- hsuduebc2 4y ago
  It worth noting that these "central bank money" is not giveaway of free cash flow. If another bank have surplus of cash on the end of the day they can lend it to the bank for some interest rate so they can make at least something out of it. This is the way how government controls inflation. When they set higher rates of interest banks usually rise their interest rates because it's simply is easier to let them sit in central banks.
  - conover 4y ago
    Are you referring to the commercial paper market? Because that’s more of an overnight thing.
jmvoodoo 4y ago
Lenders in the US offer loans for investors that are still not commercial loans. They have a higher interest rate than a loan against your primary residence. There is regulation preventing you from using a primary residence loan for an investment property, and lenders will enforce it. Commercial loans are not typically used for things with 4 units or less, however they are required for non-residential builds and for multifamily >4 units.
- Glyptodon 4y ago
  I thought in the US if you lived in a home for several years you could move out and start renting it out without refinancing for some reason. Do you have a resource for more info about this?
  - djbusby 4y ago
    You can't get a primary mortgage for a rental. There is a time term in the note, like you have to occupy for at least two years. You can use a cash -out refi on your primary and use those proceeds for a rental (but you'll need lots of equity). One can also get non-commercial loans to buy rentals but the terms (eg LTV, rate) are steeper than for primary.
    - toomuchtodo 4y ago
      You can turn a primary residence conventional mortgage property into a rental after 1 year of owner occupancy. FHA and VA are the same.
  - jasonariddle 4y ago
    An FHA loan requires you to live in the property as a primary residence for 12 months. After that, you can move out and use it as an investment property. https://www.lendingtree.com/home/fha/ https://www.lendingtree.com/home/fha/
    - jmvoodoo 4y ago
      Interesting. Did not know that. Thanks!
webinvest 4y ago
Regarding only #3, Banks can afford to give out loans that are less than inflation because they are creating money out of thin air to lend to you. Sure, the lent money is collateralized behind a property but it’s new money. It doesn’t really matter how much of a return they get as long as the return is higher than the default rate percentage and the return (after factoring in defaults) is positive. There used to be restrictions like a 10% reserve ratio. But that’s been lifted in the US in 2020. Big banks can also borrow money from the central bank to lend out. Current federal rate is 2.25%-2.5% and mortgages are about 5.9%. Thus banks keep the interest rate spread. Using those numbers, a $300,000 loan at a 30yr fixed rate is a bank product that will thus earn the bank $178,959.73 in interest. No wonder banks are the most wealthy class of businesses!
deleted 4y ago
[deleted]

serjester 4y ago

I'm going to qualify this with I'm not an expert but I do have some familiarity with the space. 1. While possible, loans where you put less than 20% down are tied to very high interest rates. Most people I know in the space avoid these or quickly refinance once the cash is available. 2. Commercial loans are difficult to get for an individual investor. If you're purchasing residential housing these aren't practical. 3. Banks interest rates are only tied to the federal interest rate.

hsuduebc2 4y ago

1). Yes they do. Some even loan you 110% (Netherland..) of property value but mostly they loan you around 80%-90% of price. Usually bigger leverage means bigger interest. 2. Not really and honestly banks usually don't care if you pay in time. 3. Now I'm talking from experience as resident of some European country. When you are giving a loan to someone to purchase a property as a bank you are not loaning your own money. You loan this money usually from central bank and then "re-loan" it for higher interest to customer. Most of the mortgages in Europe are with fixed interest for some period therefore inflation doesn't really bothers you because bank loaned this money from central bank in times where you get the mortgage when interests were low.

hsuduebc2 4y ago
It worth noting that these "central bank money" is not giveaway of free cash flow. If another bank have surplus of cash on the end of the day they can lend it to the bank for some interest rate so they can make at least something out of it. This is the way how government controls inflation. When they set higher rates of interest banks usually rise their interest rates because it's simply is easier to let them sit in central banks.
- conover 4y ago
  Are you referring to the commercial paper market? Because that’s more of an overnight thing.

jmvoodoo 4y ago

Lenders in the US offer loans for investors that are still not commercial loans. They have a higher interest rate than a loan against your primary residence. There is regulation preventing you from using a primary residence loan for an investment property, and lenders will enforce it. Commercial loans are not typically used for things with 4 units or less, however they are required for non-residential builds and for multifamily >4 units.

Glyptodon 4y ago
I thought in the US if you lived in a home for several years you could move out and start renting it out without refinancing for some reason. Do you have a resource for more info about this?
- djbusby 4y ago
  You can't get a primary mortgage for a rental. There is a time term in the note, like you have to occupy for at least two years. You can use a cash -out refi on your primary and use those proceeds for a rental (but you'll need lots of equity). One can also get non-commercial loans to buy rentals but the terms (eg LTV, rate) are steeper than for primary.
  - toomuchtodo 4y ago
    You can turn a primary residence conventional mortgage property into a rental after 1 year of owner occupancy. FHA and VA are the same.
- jasonariddle 4y ago
  An FHA loan requires you to live in the property as a primary residence for 12 months. After that, you can move out and use it as an investment property. https://www.lendingtree.com/home/fha/ https://www.lendingtree.com/home/fha/
  - jmvoodoo 4y ago
    Interesting. Did not know that. Thanks!

webinvest 4y ago

Regarding only #3, Banks can afford to give out loans that are less than inflation because they are creating money out of thin air to lend to you. Sure, the lent money is collateralized behind a property but it’s new money. It doesn’t really matter how much of a return they get as long as the return is higher than the default rate percentage and the return (after factoring in defaults) is positive. There used to be restrictions like a 10% reserve ratio. But that’s been lifted in the US in 2020. Big banks can also borrow money from the central bank to lend out. Current federal rate is 2.25%-2.5% and mortgages are about 5.9%. Thus banks keep the interest rate spread. Using those numbers, a $300,000 loan at a 30yr fixed rate is a bank product that will thus earn the bank $178,959.73 in interest. No wonder banks are the most wealthy class of businesses!

deleted 4y ago

[deleted]