Reasons To Invest In Real Estate
Check all that apply:
The Power of Leverage
Easy To Get Into & Grow
Three Ways To Make Money In Real Estate
. Cash Flow
. Principle Reduction
(check all that apply) Reasons
Proximity to home
What you can afford to pay and net returns are actually
more important than what it costs.
Enter Price Range
See "Down Payment" and "Total Amount To Invest", below.
Typical down payment percentage for 1-4 residential income properties is
25%. Requirements vary by lender. You can put less down in some circumstances. Many lenders have owner occupied requirements for 2-4 unit investments. FHA and VA investment loans are also available.
Putting more than 25% down alters your cash flow and net equity gain over time. Our SMART Residential Income Property Search Engine © automatically calculates these differences for you in our "What If?" property analyzer.
Enter Your Down Payment %:
Some investors like to be debt-free and put down 100% cash. This works for some buyers, but the general advice is to leverage your available cash and use "other people's money".
For example: Let's say you have $400,000 to invest. You might look for an income property for $400,000, and buy it with all cash.
You would actually make more money if you took that $400,000 and purchased four properties at $400,000 each, putting down 25%. Even with the mortgage debt, you come out ahead.
Total Amount To Invest
. Down Payment
. Closing Costs
. Up Front Repairs
Enter Total Amount To Invest:
So you are interested in investing in a residential income property. You have searched the investment landscape and decided on a property that has good cash flow in an area that appreciates well. You know the reported income and have assessed the market. It looks like a good investment. You now need a loan to get going on the transaction.
Unless you are using all cash, it is especially important to get preapproved for a loan. Many income property listing agents and sellers don't want to bother tenants any more than absolutely necessary during the sale process. And many of these are listed as "Drive-By Only" and "Subject To Inspection". It's a very competitive market and you have to be ready to move.
Are you pre-approved with a reputable lender?
If you are leveraging your investment by getting a loan (which we generally advise doing), the property will need to appraise for "market value" by a professional appraiser. If the property appraises for less than the agreed upon price, then the buyer will need to come up with the difference. If the property "pencils out" with good equity gain and ROI over time, this will likely still make sense. With our system, all we have to do is tweak the numbers a bit and see how it works out.
Make sure you investigate the possibility of FHA or VA funding with your lender(s). There are various programs offered for owner occupied income properties. They typically are the same minimum down payment requirements, and there are different considerations for how much the rents can contribute towards qualifying. Talk to a trusted lender about these programs.
The good news is that the lender will use all or part of the rents to help you qualify for the loan. The rules vary from lender to lender and are too complicated to go into here. Things like whether the property is owner occupied or not, how experienced the borrower is with investment properties and the number of units enter into their decisions. FHA and VA loans are also available for income properties, but generally only for owner occupied.
Bottom line: make sure you are dealing with a reputable lender who has experience with income properties.
Or consider this creative plan: All Cash to get the deal, then refinance.
Finding A Good Investment Lender
If you have a lender that you trust, try them first. And if you need to check out a loan officer that has solid experience with residential income properties and who can perform extremely well, please let us know. We will be glad to refer you.
Minimum Cash Flow
. Positive Only
. Slightly Negative
Sometimes slightly negative cash flow properties can still provide excellent returns
Enter Your Minimum Desired Monthly Cash Flow:
Gross Rent Multiplier (GRM)
Gross Rent Multiplier (GRM)
. Ratio of Price to Total Annual Income
. Similar to a stock investor "Price/Earnings Ratio"
. Reflection of rent leverage
Asking Price: $639,000
Total Annual Income: $52,800
Enter Your Maximum Desired GRM:
The lower the GRM, the better for the buyer
GRMs under 15 are often positive cash flow, depending on expenses
Compare Gross Rent Multipliers to similar properties in the area in which you are looking!
Capitalization Rate (Cap Rate)
. Formula: Net Operating Income / Purchase Price
. Similar to Return on Investment (ROI)
Monthly Rent: $4,400
Monthly Expenses: $1,030
Net Operating Income: $3,370
Cap Rate: 6.3%
Enter Your Minimum Desired Cap Rate:
% (decimal OK)
. The higher the cap rate, the better for the buyer
. Compare cap rates in the area you are investigating
Return On Investment (ROI)
Return On Investment (ROI) (Long Term)
Ratio of Total Costs to Total Net Equity Gain over time
e.g., 5 or 10 years
Down Payment (25%): $159,750
Closing Costs (1.5%): $9,585
Up-Front Improvements (1%): $6,390
Total Initial Investment: $175,725
10 Year Gain
Cash Flow (3%): $118,762
Appreciation (3%): $219,763
Mortgage Payback: $101,678
Total 10 Year Gain: $440,202
10 Year ROI: $175,725 / $440,202 = 251%
Enter Your Minimum Desired 10 Year ROI:
% (200 = double your investment)
Number of Units
The SMART Real Estate Investing System deals with
Check all that you are interested in:
Single Family Residences
Single Family residences are calculated at market rents,
whether listed as investment properties or not.
Owner Occupied or Non-Owner Occupied
Self-Manage or Professional Property Management
Professional property management handles:
. Tenant acquisition and screening
. Rent collection
. Forms and legal issues
. Problem resolution
. Record keeping
A good property manager alleviates the headaches associated with owning income properties
The SMART Real Estate Investing System strongly recommends professional property management, primarily due to (a) the complexity of managing tenants and finances, and (b) legal issues surrounding landlord/tenant relationships. Competent legal representation is also recommend, especially in the choice of self-management.
Some investor buyers prefer a rental property that is in
generally good shape. Others are ok with minor or even major repairs.
You need to determine what cost and time you are willing to absorb as part of the total investment formula.
(see "Total Amount To Invest", above)
Want generally good condition
Light Repairs OK
Moderate to Heavy Repairs OK
. Number of Units?
. Number of Bedrooms?
. Number of Baths?
. Square Feet?
. Lot Size?
. Single Story?
. Pool or no pool?
Some investors prefer a certain type of property that they have found to be easier to rent or better long term ROI, usually based on research or past experience.
For example, an investor may find that they can have more success with a 3 bedroom/2 bath property at least 1500 square foot single family residence than a duplex with 1 bedroom and 1 bath in each unit.
Another example: pools can be very attractive, but some investors do not want the liability associated with them.
Each investor needs to develop their own criteria over time, tracking and learning what works best for them.
Lenders may qualify you depending on your experience as a landlord:
. Have you owned income properties before?
. How long?
. Long term Net Equity Gain?
. Long term ROI %?
. Double your money? In how many years?
. Increase number of properties
("Grow your empire!")
. Go from smaller units to larger
. 1031 tax-deferred exchanges
Time Frame/Exit Plan
. How long do you plan on
keeping these properties?
. Thinking of selling in 5-10-20 years?
. Hold forever?