FAQs for Investors

FAQ's for investors

How much money do I need to buy an investment property?

The amount of money needed depends on the type of property, loan program, and whether or not you’re planning to live there.

If you are buying 2-4 units and will not live there, then the minimum is 25% down but the interest rates are lower if you put 30% down.

If you own more than four Fannie Mae financed buildings, then you can still buy another property but the interest rates will be higher.

If you plan to live there, Fannie Mae will require 20-25% down but FHA (Federal Housing Administration) will allow 3.5% down, YES 3.5% down on units. This is the best way to start your real estate portfolio, and the rental income will help you afford the housing payment.

I’m retired. Can I still purchase income property?

Yes!
Buying rental property could be the best move for your retirement (and retirement could come sooner than later).
The rental income may help you afford the housing payment and you can still qualify for a loan.
For more information contact me today for your free 90 minute consultation.

What is the down payment needed to buy 4 units?

Depending on the loan program, whether you intend to live there or not, and what the property’s potential cash flow is, it can be from zero down to 3.5% to 30% down.

What is the down payment on an investment property if I’m a veteran?

Veterans can do a ZERO down payment on an investment property if they plan on living there.There are of course rules to follow. See the FAQ’s for Veterans.

Should I pay cash for my investment property?

There are two problems when paying cash for a property:
1. Low rate of return on your investment.
2. High opportunity cost. I’ll explain…The more cash you put down on a property, the less your return on investment.  which means you have “sleepy money.”*For example: If you put 25% down on a four-plex that costs $400,000, you made a $100,000 investment in your property (400,000 x 25%).

Let’s say you have $4000 a month in gross rents (rent collected before taxes and expenses) and you are probably netting about $835 per month or $10,000 per year in cash flow. This gives you a return of approximately 10% ($10,000/$100,000).

If you pay cash and invest $400,000 in the property, then there is no mortgage. If your cash flow after taxes, insurance, and expenses is approximately $2,600 per month or $31,000 per year, then your return on investment is only 7.8% ($31,000/$400,000). A 2.2% difference on your return on investment.

The second issue is high opportunity cost.

That is, by paying cash you have put all of your eggs in one basket.  Instead, you could have bought 4 properties, spread your risk, have 4 properties going up in value… and eventually, because of appreciation, doubled your money!

If you only bought one property for $400,000 cash and 15 years from now it’s worth $800,000 you would have gained $400,000 or a 100% return on the equity.

However, if you would have bought 4 buildings worth $400,000 each and in 15 years they are all worth $800,000 each that would be $3.2 million total value ($800,000 x 4) AND you would have gained 700% (3.2 mil-$400,000/$400,000).

That’s the power of leverage!

*The above illustration of the concept of leverage is for demonstration purposes only and is not a true case study. Though many people have achieved similar returns through leverage, or “not putting all your eggs in one basket”, this is not a promise nor guarantee of returns or that you will achieve same or similar results. Investing in any asset involves risk and you should therefore consult tax, legal and financial experts before investing as individual results may vary.

Can my parents co-sign on an investment property?

Yes!
Under FHA guidelines, your parents can co-sign on 1 and 2 units but not on 3 and 4 units.
If you are buying under Fannie Mae, and not living, there then you are co-investors (they are not a co-signer in that case) on the property…and that’s ok.

How much down payment do I need to buy an apartment building?

An apartment building, or “multi-family residential building,” is a building that has 5 or more units and is subject to commercial financing.
The down payment is usually 25%, although there are programs that require 20% down.
The amount of down payment depends on how much the “building cash flow can support.”
For example, you may be self-employed and do not have a lot of taxable income showing on your tax returns.  But you have prior experience managing a building, have fairly good credit, and show that you have very little debt. You may also have cash reserved in your business.
This means that if the building has strong cash flow and is in decent shape, you may only have to put down 20%.
Some people who are self-employed qualify for 8 units better than they qualify for 4.
Many commercial lenders take a more “common sense approach,” whereas they look at your credit history to determine whether or not you are a “slow pay.” They also look at how much debt you have maintained and paid off.

I want to buy an investment property near my son’s college. Is this a good idea?

It is a good idea as long as you have a plan on how you will manage the property after he graduates.
The best way to determine the viability of an investment is to check and compare the prices of condos, large homes, and units.
Then, interview a couple of property managers around the area and ask about the neighborhood turn over etc. That way you can determine if buying versus renting makes sense.
FHA has a program where you can put 3.5% down on the unit your son will occupy called a “kiddy condo. “ It’s a great program to help you afford college housing.

Is it better to invest in a house or units?

Investing depends on what your financial goals are for the short term, midterm, and long term.Investing in units is very much like investing in mutual funds, because you spread your risk. So for example, if you buy 4 units and one person moves out, you have the 3 other rents to cover your expenses.
Whereas investing in a home incurs more risk because if one person moves out you have no coverage on your expenses.
Just like your stock investment and retirement plan you need to have a real estate financial plan.
Contact me today discuss your real estate investment goals during your free 90 consultation.

Is a condo a good investment property?

Condos present opportunity and risk like any investment.
Are you investing in a retirement community, in a vacation area,in the city, or the suburb?
Are there 3 units or 500 units?
Is it an old building or a newer building?
Is the business of the association run smoothly or are they having problems?
Do they have adequate insurance?
How many renters are there in the building?
Do they have reserves that match the age of the building and age of the improvements like the roof?
Are you buying this property for short term or long term?
All these questions have to be considered since buying a condo is buying a business.

How do I calculate my return on investment?

There are several schools of thought on calculating return.
The ROI or the return on investment is usually calculated as the annual income divided by the amount of the investment.
The investment typically is the down payment, closing costs, and upfront repairs to make  the property rentable.
Some investors also include the amount of principal reduction as part of the return.
Some investors include the tax benefits or depreciation in their return, as well as an estimate of appreciation. Since these vary by person, are market dependent and not straight line calculations, many argue that they should not be included.
However, if you want a simple or starting calculation, start with the monthly cash flow x 12 divided by your initial investment.

I’ve heard nightmare stories about being a landlord. Are they true?

That’s great question!Most landlords have a smooth experience but you do hear stories about tenants destroying property, not paying rent, and leaving in the dark of night.
I recommend you do your due diligence on the property and the neighborhood before you buy.
Then consider creating a system that examines the tenant or even better hire a professional manager.
Professional managers have a system of checks and balances, and a well developed a sense of “good” versus “bad” tenants.
Investing in any asset involves risk and you should therefore consult tax, legal and financial experts before investing as individual results may vary.