Some
financial things to consider:
Real estate financing for your investment property can be simple or complex. Investment property mortgages, or commercial mortgages as they are sometimes known, are available for real estate investors, as is private money, but the decision to use investment property mortgages to finance your real estate investment depends on very specific aspects of the particular investment property, the current financial market, and the financial circumstances of the investor. Some things to consider are mortgage interest rates, tax issues (income vs capital gains), payment issues and rent collection, maintenance costs on the property, debt service, and other financial matters.
Registered users of this site can access comprehensive cash flow management tools to determine cash flow and other aspects of managing your investment property, to see what numbers work for you.
Have some capital to invest in real estate?
Not Enough for the property you are interested in?
Visit Waterfront Finance for investor assistance.
Commercial mortgage financing costs more in terms of interest than residential loans of the same value. This is because lenders consider the commercial mortgage somewhat more risky. After all, generally investors don't live in their investment properties, and view maintenance as an unwanted expense. Of course a real investor would want to maintain the value of the property and therefore would want to keep the property well maintained. In any event, in commercial mortgages, interest rates are higher, and the lender is generally more demanding in their criteria for approving the loan. We are talking about investment property loans from standard lending institutions. Private funding is also available, and while it does have advantages, it is is usually even more expensive that commercial mortgage money.
When
Should You Sell Investment Property?
If
you believe what it says, late night TV is full of great ways to invest
in real estate. Most investors -- they seem to suggest -- are looking
at big paybacks with no money down. That's unlikely, like going to the
store to buy a watermelon and offering to pay for it with a paper clip.
It
takes forethought and preparation to be successful in real estate investing. You
need to realize that buying real estate is investing and with investing
there is risk: If you don't know what you're doing, you can make a costly
mistake.
Choosing
Your Investment
Beginners to real estate investing should start with small projects, just like Walter from Hawaii.
He's been involved in investing in real estate for more than 12 years and invested
in various two- to seven-unit properties. Properties -- both commercial
and residential -- in good locations have made money for him. The properties
he purchased in marginal locations, with high leverage down payments and
extensive tenant turnover have not worked out for him.
Walter
started with a duplex, which he later refinanced to buy a four-plex. He
painted and put a new roof on the four-plex, then sold it for a seven-plex.
He also bought a four-plex with one-bedroom units. He renovated the units
and installed new siding, but in the end, he was lucky to receive a return
on his investment.
|
|
|
|
Living in Oregon, he was far away from his real estate investments in Hawaii and could not pay enough attention to the renovations. One moral of the story is that fixer-upper investments -- like real estate investments generally -- work best if you live nearby and, if possible, do the work yourself.
Other factors hampered the success of his investment, such as a market more suited to two-bedroom units rather than one-bedroom units. As to Walter, he learned more with each investment and he also learned to be conservative.
Whether you're looking to purchase a house, duplex, 50-unit apartment project, or commercial property, you need to carefully review the property's economics. Are the rents used in your projections realistic? Are the expenses correct? Can you live with the cost of investment mortgage financing? What happens when you have a vacancy? Is there enough cash flow to cover it? |
|
|
Are
you putting money aside in a reserve account? How much money do you
have to spend on repairs? Some investors believe that they should never
repair a property. Unit inspections in occupied units will uncover problems
that can be solved while the tenants are still living there and while
there is cash flow, rather than waiting for a vacancy.
The
West Coast and the Sun Belt are currently better bets than investing
on the East Coast. Larger cities tend to be better investments than
small towns because there is a larger potential pool of tenants and
buyers. Communities located on freeways also tend to be more attractive
as investments because they have good access to metro areas. Vacation
destinations or towns that are economically diversified will be more
stable as well.
Another client had 13 houses in the 1980's and lost them all. So he
went back to being a painter and started all over again one house at
a time. His goal is to have 20 houses for retirement. He adds bedrooms,
renovates, upgrades, and paints them, and then he either sells them
so he can buy two more or holds them.
Planning
an Exit Strategy
Remember that the economy, interest rates, layoffs, job opportunities,
and construction trends impact every real estate investor. Watch the trends and
speak with local real estate brokers, appraisers, investors, mortgage brokers, and real estate attorneys.
A real estate
investor always needs an exit strategy, preferably more than one, when
he or she buys property. You need to have a vision showing when you
will sell, if you will take the money and pay taxes or complete an IRS
1031 tax deferred exchange. Is your plan to have enough money for retirement?
Are you going to pay off the property or refinance it and use the proceeds
to buy another investment?
What if values decline?
If you live in a depressed marketplace you need to decide if the weak
economy will last a long time or if the area will pull out of it. This
information is critical to your exit strategy. If you cannot find a
buyer when you're ready to sell, then what? Structure your investment property mortgages
without prepayment penalties, or make sure that your loan can be assumed.
Check what the loan assumption costs will be and if your real estate financing terms
will change with an assumption. Remember banks structure loans to benefit
their bottom line and financing can be very hard to assume or refinance.
It pays to research financing options before you make a final decision,
and interest rates should not be your only focus.
You
have to think ahead and be prepared for a range of possible events.
For example, you invest with your best friend and her husband, but she
gets divorced and needs the funds out of the investment to pay off her
husband, what would you do? Another variable is your health or your
family's health: Will you may have to liquidate the real estate to pay
bills?
Your
exit strategy will help you make a better decision as you invest into
the future. Plan your goals ahead. No one is forcing you to buy. Pick
your time, and pick a property you can live with into eternity. Worst
case, if the market does not move the direction you expect and the value
does not go up, at least your tenants are paying off the loan.
|
Have some capital to invest in real estate?
Not Enough for the property you are interested in?
Visit Waterfront Finance for investor assistance. |
|
Proud Sponsor of