Getting into investment real estate may seem like an impossible task. As a realtor and property manager of 16 years there have been many opportunities and options open for creative thinking that can help with getting into real estate investing. Let's start with a little more information about different ways that I started investing. I have invested using multiple strategies such as, owner finance, loan assumption and 1031 exchanges, and have completed specialized courses in property management, construction and 1031 exchanges.
You may be asking, “Where should I start?” There are a few questions that should be answered. Determine your financial situation. How much money is available for a down payment? What is my credit score? When you know your financial status, then evaluate what you want to get out of your investment. Investors usually look at two categories, cash flow and equity. Skilled investors and realtors determine this by looking at the current market and running numbers for cap rates, return on investment, and rental rates.
Purchasing for equity. Getting assistance from an experienced realtor to get a picture of the current market and trends is helpful. What type of market is it? Is the market one that tends to cycle with large crashes or steady with increases in value. The realtor can assist in finding a property that has potential to increase in value. There are two ways to increase value. Start by looking for unfinished space that could be finished or a home that is under normal market prices. Finishing a space increases the price per square foot, thus increasing the value. The strategy for equity gain may be holding a property long term. Keep in mind that if a property is held long-term, the property needs to be maintained and the market is not predictable.
Investing using a cap rate and ROI are also strategies when determining whether to invest. A cap rate (capitalization rate) is determined by dividing the Net Operating Income (NOI) by the property value. Net Operating Income is the income minus expenses. If a property has a NOI of $100,000 per year and a value of $1,500,000 it has a cap rate of 6.67%. Investors look for cap rates between 4-10%. When making an offer make sure there is a period of due diligence before making an offer or within a time frame to review the financial documents of an investment property. The large property equals more time required to review leases, Profit/Loss statements and bank statements. It is highly recommended that a realtor with experience in investment property can help to review documents and what documents to request in the contract.
Investing as a self-employed person or if you are not self-employed, lenders will require documentation to be approved for a loan. They are looking for 2 years of tax return, W2’s for employed persons, Profit/Loss statements for self-employed. Loans require a credit score to be pulled. The higher the credit score the lower the interest rate tends to be. Time should be set aside to gather documents to send to your lender for qualification.
Several loan types are available to invest in Real Estate. Depending on the type of loan that is chosen will determine the amount of funds that will be needed for a down payment. VA loans, FHA loans, 203k FHA loans, Conventional loans and Property Qualifying loans are the main loans that will be discussed.
VA loans are for Military Veterans past and present. These loans have a loan limit of $458,250 on a single-family residence in Larimer County. Contact a lender to find out loan limits for a multifamily property. With VA loans, quadplexes (4plex) can be purchased with no money down and closing cost assistance provided by a seller. This is a great tool to start investing. Rental income may be used to qualify for the loan. It is required to live in the property for approximately 6 months before moving to another property.
FHA loans can be used for investing with 3.5-10% down. Like the VA loan, quadplexes are the largest properties that can be purchased. You must live in the property. FHA loans are structured for first-time buyers. If you have not owned a home, you could qualify for this financing.
Has a property been found that requires remodeling? A 203k is a program through FHA that allows for the purchase of that property. A contract and draw schedule are required from a licensed builder/general contractor. A down payment of 3.5% will be required on this loan and you will be required to live in the home for a minimum of 12 months. This loan does have the benefit of gaining the funds for the remodel of the home that will be included in the loan.
Conventional loans require 10-30% down payment. The potential rental income may or may not be considered depending on the lender or the bank servicing the loan. Conventional loans consider the buyer's credit score and debt-to-income ratio.
Property Qualifying loans/Asset Qualifier Home Loans are great for self-employed individuals. They generally do not require tax documentation to be approved for the loan because the lender is looking at the property as an asset. The downside to this loan is that it is at higher interest rates and the down payment required will be 20-30%. To qualify the property will need to have a specified rental income versus what the mortgage amount will be. The property will also have to be “seasoned” for at least 6 months. This means that the property will need to be rented for 6 months minimum prior to closing.
Using a 401k to purchase real estate or refinancing a home to buy investment property is a possibility. There are some tax benefits to using the funds for real estate investment purposes. It is recommended that you speak with a tax accountant and/or the company in which you have a 401k held to make sure the process is done correctly as to minimize impact to your taxes.
Now that the options have been assessed for investing, let’s look at the market. Larimer County has seen property values steadily increasing up until around July. It seemed like a battle to get an offer accepted, causing buyers to offer over asking price. While investing during a “boom” is difficult, it is not impossible. In today’s market we see more properties available for sale with longer listing periods. Now is the time to get ready to buy investments and personal use real estate. To understand where the market is heading, we need to look at the past. February versus August shows that property value on average increased approximately $9000. In February there was less than a month's supply of homes for sale compared to 1.7 months’ worth today. While Colorado tends to fare well when the rest of the country comes down from a housing boom, Colorado also sees lower prices in the months from October through the end of January. Buying over the holidays is the prime time to purchase your next investment! If you are ready to start your investment journey, I am ready to guide you and answer any questions that you have.