|Real Estate Information|
Investing in Residential Real Estate: Achieving Positive Cash Flow
When investing in real estate, it is highly desirable to achieve positive cash flow on a month-to-month basis. This is true even if you are counting on property value appreciation to supply the bulk of your desired return on investment. If you are losing money month-to-month, you may find all of your eventual profits eaten up by the monthly drain on your income. This will be particularly true if there is a downturn in property values for a few years.
Worse yet, you may tire of the monthly outflow of cash, and you may give up on the property before you have a chance to achieve the desired appreciation. You will be much more comfortable waiting for your property to appreciate if you are making at least some money every month, or at least not losing money every month.
One exception to this rule is when you are purchasing a property to fix it up and flip it. While you are fixing it up, you may not be able to rent it out at all (depending on how extensive the work is) or you may have to rent it at reduced rates. The negative cash flow is just part of the expense of rehabilitating the property and will be quickly reversed by your profits upon sale of the property. This assumes that you have properly calculated all of your costs and you have purchased the right property.
In other cases, we think it is wise to achieve positive cash flow, Here are some tricks and ideas involving the financing of the property:
Lower cost properties are generally easier to rent at a profit than higher cost properties. It therefore makes sense to purchase two or three smaller homes than one larger one, if your intention is to rent them out.
If you don't already own your own home, consider living in the first "investment" property you purchase. (This assumes it is convenient to live in the area where you want to invest.) Interest rates and down payments are lower for a primary residence. Also, you don't have to deal with the problems of finding and managing tenants, paying for any damage they may cause, and absorbing the cost of an occasional vacancy. This will also give you very valuable experience in dealing with real estate.
If you live in a home for only two out of five years, it probably qualifies as a primary residence from the point of view of the IRS, and therefore appreciation of the property value is probably tax free up to a certain level (for federal income tax). Check with your tax advisor for the exact rules. So one strategy is to purchase a new investment property every couple of years, live in it for the first couple of years, then purchase and move into another property. Rent out the first one while it continues to appreciate. Since you live in each new house for the first few years, you can get a loan at primary residence rates, and you will also have the tax benefits of a primary residence, yet actually own several homes at the same time.
A "second home" (that is, a vacation home) also qualifies for preferential interest rates. You have to be able to state that you live there a portion of each year and you cannot claim rental of the property as income. There are other requirements such as location of the property. If this fits, consider making one of your investment properties a second home. Do check with your lender to be sure you know all the requirements for a home to be considered a second home before you go out and buy one. Note that with a second home, you cannot use any rents your charge as income. You will have to qualify for the loan based upon your income without considering any rental income from the second home.
The easiest and best way to achieve positive cash flow is to get a loan with a ridiculously low interest rate for the first several years. Nowadays, a number of lenders offer "payment option" loans. These loans offer an optional minimum payment that starts with a rate between 1% and 2%, which results in very low monthly payments. As a general rule, these low rates last for about 5 years. During this period, the minimum payment increases year-to-year by a very small amount, usually no more than a factor of 1.075 per year. If you take advantage of the minimum payment, you are actually charged a normal variable interest rate (such as about 4.5% today), but the interest you are not paying is deferred. At the end of the first five years, the interest you have not paid is added to the loan amount, increasing the loan amount by a relatively small amount. Ask your loan officer to calculate the exact amount. At that time, the loan then becomes a standard variable rate loan. This is not a problem because you can assume that property value appreciation will be far larger than the deferred interest. With this plan, you should plan to refinance or sell the property within 5 years, which is commonly not a problem. (Such loans may not be available in all states.)
Another way to minimize monthly interest payments is to obtain an interest-only loan. The interest-only period of most loans is usually 5 to 10 years. You should plan on selling or refinancing by the end of this period.
The interest rate you pay and your eligibility for special loans such as a "payment option" loan is subject to your credit rating, your employment status and the financial reserves (savings) you have on hand. Do everything you can to get your credit scores above average (above 640 and preferably above 680). Make sure you are steadily employed in one profession or engaged in your own business or profession for a period of at least one year steadily, and preferably two, and make sure you can prove it. Extended gaps in employment can make qualifying for a low interest loan much more difficult. Lastly, save up enough to make at least a 10% down payment. This will open the door to better rates.
Payment option loans as described above generally require 20% to 25% down payments. A down payment of 20% or more will also eliminate the need to pay for mortgage insurance. Mortgage insurance is charged by all lenders for loans with less than 20% down payment, even if it is not explicitly stated as such. The extra expense may be built into the rate (as is the case with so-called "sub-prime" or high risk loans), rather than stated separately, but it is there. Mortgage insurance covers the lender against the risk of a default, when there is not enough extra value in the property to pay off the loan and the expenses of foreclosure.
The above tips and ideas may get you started toward positive cash flow in your real estate investments. There are many other ideas that may apply to your particular circumstances or where you live or where you want to invest, and not all of the above ideas may apply to you. We are writing from the U.S. Outside of the U.S., laws and loan programs may be completely different than the above. In any case, please ask your loan officer or financial advisor for his or her opinion and ideas to verify and add to the above.
Jeanette Fisher, Design Psychology Professor, is the author of "Doghouse to Dollhouse for Dollars: Using Design Psychology to Increase Real Estate Profits," the only book to reveal interior design secrets on how to make top dollar investing in real estate. For real estate and interior design psychology books, articles, tips, and newsletters: http://www.doghousetodollhousefordollars.com.
Robert S. Kramarz is a loan officer for a major loan brokerage. He has over 20 years experience in finance and business management and comes from a family a long background in real estate investing and banking. He specializes in providing financing for purchase of investment real estate. He can be reached by email at MrFunding@22cv.com. Further information is available at the website http://www.sweetloan.info.
This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news
What Should I Do If My Home Isnt Selling?
Suppose you've been trying to sell your home for months. You haven't had even a nibble from a prospective buyer.
Forclosure And The Durrett Rule
It's probably happened to you..
How to Buy Your Own Home
Buying Your First HomeBuying Your Own Home isn't nearly as complicated as some folks make it out to be. Your first step should probably be to contact a Mortgage Broker (check out the on-line Mortgage Companies on my Site -- they're a great way to quickly find out how much you qualify for, and they often have better rates than the standard Banks.
Choosing a Residential Lot
Finding a lotPlanning for your new home is a very involved process. You might want to get right down to selecting a set of house plans but don't get into a hurry.
Selling Your Home Quickly, Even if You Have No Money For Repairs
Do you need to sell your home quickly? If so, don't be tempted by the ads you see that say "We Buy Houses" or "Sell Your Ugly House in 9 days for Cash." Those types of ads are placed by real estate investors who are looking for sellers under duress, and they'll only pay up to 70% of the low end market value for your home.
How To Start Investing For Financial Independence, Part 2
Last week, we started a multi-part series about how to go from being a beginning investor to being "financially independent" in a steady and predictable way. Many, many people want to overly complicate this process so let's briefly, let's recap that discussion.
Using Color Psychology to Sell Your Home
When painting your home for resale, choosing the right colors can make a huge difference in your paycheck at closing. For instance, did you know that the exterior color of houses selling most quickly is a certain shade of yellow, but that choosing the wrong shade of yellow can kill a sale?You'll find many brochures in paint stores, showing various combinations of exterior paint colors.
A Real Estate Investing Primer
There are a great many books and web sites devoted to real estate investing out there, but most of them concentrate on one specific area of investing. It's often hard to find a general description of real estate investing, one that lists the various real estate investing strategies and how to get started.
Getting Started in Real Estate Foreclosure Investing
Decide to Invest in Real Estate Foreclosure InvestingWith the increase in Real Estate property appreciation rates across America, a prospective foreclosure buyer may want to fix up a property to improve its value to live in, to rent out or to resell. The strategy a buyer pursues will determine which foreclosure property to buy and the location.
Selling Property - Valuing Your Property
Selling property privately has many advantages over using an estate agent. However estate agents can provide useful local information not available from the internet.
New Housing Starts Do Not Guarantee Aftermarket Sales
We have been studying a trend of new home buyers in the US in light of this latest housing boom. And how we should adjust our strategies to deal with it.
Create a Great Webpage to Sell Your Home
The majority of people in the UK who are looking to move house use the internet to find properties for sale. So it makes sense to ensure that your property is on the web if you want to sell.
Property Investing Secrets 1
When property investing, pay the seller their asking price but negotiate the terms under which you can buy property. You'd be absolutely surprised when property investing at how many sellers will help fund you into their property.
Probate & Obituary Marketing
I start my marketing with obituaries followed with probate filings and find it just another effective way to acquire property.Short of courthouse research you can go to your local library and go to the reference department and research using what is called a Polk City directory that will list if the deceased party owns real estate.
How To Get The Best Rental Accommodation In The Area By Using Your Capital
My report is for you to use your power to negotiate, not only a reduced weekly cost of accommodation, but also to get the best accommodation available in the area in which you wish to live.Hello Colm Dillon here .
Buying Outer Banks (OBX) Investment Property
So, you're thinking of purchasing a rental property at the beach. Historically, real estate investments have proven to be a wise investment strategy.
Legal Information About the Real Estate Contract
The conclusion of final agreement between a seller and a buyer is the Agreement of Purchase and Sale. We know it as the real estate contract.
Wealth Building - An Advantage of Home Ownership
As you grow older, the issue of wealth building comes front and center. Wealth building simply refers to increasing the net value of your total assets.
Buying an Unfinished Home Maybe Your Answer
For the first time "want-to-be" homeowner, purchasing an unfinished new home maybe just the answer. With mortgage interest rates still at record lows, there has not been a better time to purchase a home in decades.
Selling Your Home - Be Sure It Shows Well
Whether you are selling a house, townhouse, condo or apartment, there are universal tips that will help it sell. Primary among those tips are making sure your home "shows well.
|home | site map|
|© 2006 TIGER MEDIA|