I wanted to share some straight talk for real estate investors who are interested in increasing their cash flow by borrowing conventional money to purchase single-family or two-to-four-unit residential real estate.
What I am going to share with you is the reasons why so many are purchasing real estate right now, the business models these investors are using for cash flow and the loan products used to obtain real estate with some general qualifying parameters.
This blog is for the real estate investor who is DREAMING BIG and understands all of the below as it relates to real estate investment residential purchase:
- Cash flow
- Positive cash-on-cash return
- Increase net worth because of possible price appreciation and the fact that a tenant or tenants are paying down the loan
- Diversify your personal investing in different asset classes
- Tax strategy, as some write offs are operating expenses, interest on the loan/debt, property taxes, property insurance and phantom deduction known as depreciation (internal and external)
- Real estate is physical, you can touch it
- You own it!
- Single-family and two-to-four-unit vacancy rates extremely low in Arizona
- Rental market rates on fire. It’s going up as baby boomers age and want to sell their house and rent, and as millennials have a difficult time qualifying for a loan for purchase.
- Homeownership rates at lowest levels not seen in years and the prediction is more and more people will be renting in the next 20 years then owning, which will erode the home ownership levels further.
- Suburban rents are exceeding urban rents in Maricopa county.
- Many buyers are not able to because of student loan debt, not being able to save and concerns about job stability.
Three types of business models being used after the close:
- 12-month, Traditional Lease. This is the most common and probably the one you may be considering at the moment. If you are weighing your options and want a “safer” investment, this may be the way to go.
- Vacation Rental. This model is increasing in popularity. If you went this route you may consider buying a property in a neighborhood or subdivision that does not have an HOA. The reason being is that a lot of HOAs require that you rent out the property for a minimum of 30 days. Typically, people aren’t spending 30 days on vacation, so that would be a problem. So, find a property without an HOA and you may be able to rent it out on a daily basis, which could end up being successful.
- Assisted living. This is becoming more popular for investors. Essentially, you could purchase a residential property and instead of renting it out for vacation rentals or a 12-month lease, you could get people to rent out individual rooms who need assisted living. Now, you may not be a caregiver or you may go get your caregiver license, but you could also consider hiring a caregiver. There are some zoning and legal parameters you must adhere to with the state and city so please do your due diligence.
The general loan parameters for this with a conventional loan:
- Conventional loan, 15 percent down* for a one-unit and 25 percent down for a two-to-four unit.
- We can use the projected rental income for the subject property to help qualify the investor.
- Need credit and income to qualify.
Now that you know the types of business models, you are going to definitely want to get some boots on the ground, so to speak, as you begin the shopping process, as this is the best method. You need to be looking at many deals and to make sure the numbers, location, business model etc., work and make sense. Here is what you are going to want to do:
- Speak with the neighbors
- Walk through the community
- Research the school districts
- Look into the local public transit
- Analyze the crime rates
- Run the loan scenario and look at your expenses
- Examine what your potential cash flow and net profit may be
- What business model should you use?
- Jobs/employment opportunities
- Entertainment distance
If you have questions about the debt structure of a loan so that you can obtain real estate in order to operate these business models, or any other questions, please contact me. I love a good Q&A!