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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.
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.
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!
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.
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.
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