Although owning investment real estate has traditionally been thought of as a good, relatively safe vehicle, it does require some knowledge, awareness, planning, and careful selection of the right/appropriate property. I strongly believe that potential investors should pay close attention to these 6 basic principles and the realities of doing so. With that in mind, the purpose of this essay is to investigate, examine, review, and debate these quickly.
1. Higher down payment:
When a person buys a multi-family home, unless he plans to live there, lenders look at it differently in terms of how much of a down payment is necessary if the house is purchased with a mortgage. While laws and conditions vary, the typical conventional mortgage for a single-family home is 20%, but it is 25% for a non-owner-occupied home.
2. Additional requirement/ anticipated income/ revenue/ cash flow:
Lenders typically base their decisions on the appraised value of a single-family home, as well as a set of numbers, ratios, and other factors believed to represent a borrower's ability to repay, among other things. However, in multi-family circumstances, a key requirement is based on anticipated rents, income, and cash flow. To reduce the lender's risks is done.
4.6% rule of thumb:
I call the 6 percent rule a smart rule of thumb. The Cash Flow is equal to the revenues (expressed conservatively) less the ownership costs (paid monthly or averaged that way). This implies that the real Cash Flow must be at least 6 percent positive!
5. The 75 percent occupancy rule:
When calculating expected revenues, keep in mind that vacancies will occur, and be ready. To account for this contingency, drop the figure to 75% after estimating the revenues using market - rates - rents!
6. Renting ease/demand:
Think about your local real estate/rental - housing market and whether renting is difficult or problematic when there are vacancies. Find out how long similar condos in this area typically take to rent.
Richard is an RE Licensed salesperson for 15 years and has been a consultant for three decades. He stresses that it is imperative to position yourself, to make the wisest real estate decisions, by considering, at least, these 6 relevant factors, before investing in a specific property. Will you proceed, with the discipline, to be a wiser buyer/ investor?