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Financing Investment Property Here in Sacramento, some distressed areas such as Elk Grove, Natomas and Antelope have seen up to 150% declines from their previous peak. That leaves you, the actual or potential Real Estate Investor right in the driver's seat. Certain forclosed properties have amazing potential and are often sell for less than the true appraised value. Not as easy as it looks There are however a few items you need to become a sucessfull real estate investor. - Substantial down payment. Traditional Non owner occupied investment mortgages require, at minimum, 20% or more of the purchase price to be in cash.
- Ability to secure a loan-this is key! The same lending conditions which are creating these amazing prices are doing it by making it tougher for people to qaulify for loans.
- Experience managing property or contacts who do. In this market, it is usually not possible to "flip" property just by doing repairs...you must acknowledge the possibility of needing to rent out the house for a year or two.
- Assistance of a seasoned, expert real estate agent. A soccer mom who is a Realtor on the weekends will not do. You need representation by an Agent who knows the players involved and can use every single possible advantage.
Finance Options There are essentially three different means of financing investment property: Which is the right choice? | Loan Type | Trashed Property? | Bad Credit? | No Income? | Creative Financing? | Days to close | Down Payment | Cost (range) | Rate (range) | | Conventional | Never | Never | Never | Never | +/-21 | 20% | 1-2 Points | 6.25%-7.00% | | Portfolio | Always | Sometimes | Sometimes | Sometimes | +/-35 | 10-30% | 3-5 Points | 9.00%-12.00% | | Hard Money | Always | Always | Always | Always | 7 or less | 30% or more | 6-15 Points | 12.00%-20.00% | "always" Status does not guarantee loan acceptance |
It is clear that Conventional loans are the least flexible, and Hard Money is the most. But that flexibility is very risky and thus expensive. Such a choice is usually made by the property which you decide to purchase, or the components of your individual financial situation. So what if the house is trashed, anyway? Suppose you are in contract to buy a foreclosed home. You have excellent credit and have been approved for a low cost loan through your bank. The property inspector finds extensive repairs are necessary to the plumbing and roof. Even though the seller will discount the sales price steeply, your bank declines the loan calling the property “uninhabitable”. But you can instead secure a rehab loan based on the future appraised value, which can finance the needed repairs and allow you to complete the transaction.
Example: Sunrise Vista Rehab Loan | Standard Conventional Loan | After repairs value= | $310,000 | N/A | N/A | Purchase Price= | $200,000 | $200,000 | =Purchase Price | Repairs= | $25,000 | $25,000 | =Repairs | Closing Costs= | $12,000 | $8,000 | =Closing Costs | New loan= | $217,000 | $160000 | =New loan | Cash to Close= | $20,000 | $65,000 | =Cash to Close |
In this case a normal Fannie Mae loan would have required 20% down or $40,000, plus repairs, so this investor benefits by holding onto as much of his cash as possible.
Speak to one of our Investment Finance Specialists today.
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