Most people really only have mortgages on their homes, loans on their cars or loans for renovations to their homes. Some will also have consolidation loans, however there are a group of investors who routinely arrange for investment loans that they will use to make investment into a variety of things. Some people will invest in rental properties for commercial or consumer rentals, others will invest in stocks and mutual funds. In fact there are many different types of investments that people will consider and obtain loans for. All of these investments will trigger investment installment payments, which are factored into the overall business case as well as the cash flow for the investor.
Cash Flow is King
Whether it is your personal finances or your investment plans, cash flow is the single most important element in all of your financial planning. Sure you want to make a profit, however if you cannot carry the cash flow which includes the investment installment payments, you risk losing your investment or worse having to sell it at a loss. As part of your financial planning and assessment of any investment, always take into account the monthly installment payments to ensure that you have the cash flow to meet these payments.
Investment Business Case
Next to cash flow and installment payments, the business case for your investment is obviously important. There are a number of areas that you will need to assess to determine if the risk of your investment is worth the potential return you expect.
Most business case assessments deal with the income you can expect and the cost of the investment. Costs can be operating costs, interest on loans, and other license fees or permits that you may need. If the revenue / capital gain will not cover the costs and give you a reasonable profit then it may not be a good business deal to get into.
Investment Variables.
There are many variables to investments. Obviously once you have paid for a particular investment you have a fixed cost. From that point forward many things can change. Operating costs can vary from estimates. The value of the property or investment can change in a positive or negative direction.
The cost of the investment loan can also vary depending on the type of loan that you have. Interest rates change , so if you have a variable interest rate investment loan, the monthly installment payments can change a lot. Basically with a variable investment loan, you need to pay the interest that becomes due each month as a minimum.
The terms of your loan will dictate just what the minimum payment must be, however you must recognize that these payments can and will change, which impacts your investment installment payments each month.
How Much Money Can You Borrow?
Investment loans are usually handled much differently than personal loans. They have all of the same attributes, however obtaining an investment loan is usually much more difficult. The banks are understandably nervous about investments and your ability to repay the loan.
The banks will assess the risk of the investment that you are looking at to determine what the probability is that they will get their money back. They may also look at your reputation as a business person and your track record in terms of repaying loans through regular installments. Finally they may assess your personal credit rating, since ultimately they are expecting you to repay the loan even if the investment goes south and you cannot recover your original investment.
This is an important point that many people may not understand. The banks are loaning money every day with the expectation that they too will make money from loaning money to you. The only way they can do this is if you meet all of your loan installment payments until the loan is repaid or you repay the loan with a lump sum payment.
If your investment does not pass their criteria, they might refuse the loan application, or they may still loan you the money as a personal loan. You may have to pay a higher interest rate as well if they feel that the investment is high risk or if they feel you are high risk. Both of these factors have the impact of increasing your overall cost and your regular monthly installment payments. Evaluate your cash flow under these circumstances to make sure that you are not jeopardizing your investment as well as your personal credit rating.
Tax Statements
In most countries the cost of your investment can be deducted from the revenue you make before you calculate your total income tax due. Loan interest is a cost of doing business as are other fees and operating expenses that may also be involved.
Keep accurate records of your costs, monthly installment payments, as well as revenue. Your accountant will be able to separate the interest paid from the principal repaid from your monthly installment payments. Note that is only the interest that you pay for the loan that can be deducted and not the principal that you have repaid.
Increase interest charges will decrease your profit, however they also decrease the amount of tax that you ultimately pay. Your net profit is based on the revenue you took in, less your costs that you paid out less the taxes that you had to pay on the net profit.
Summary
Remember that cash flow is king and must be managed carefully so you do not default on your loans. The business case must show how you will make a profit and also show what risk there is and how it will be handled. The financial institution that will loan you money will want to know how it will get its money back either from the sale of your investment or from monthly installment payments you will make. In the latter case you must be able to demonstrate how you are able to repay the loan either on a monthly installment basis or a lump sum from the sale of your investment.
Disclaimer: The views expressed by this author don't necessarily reflect the opinions of Lazerloan.com, it's owners, or it's affliates.
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