A golden moment for real estate investing
If you’ve ever been tempted by real estate investing, now might be the perfect time to turn your dream into reality. Because the factors that can lead to success rarely line up better than they do today.
Let’s look at them. Mortgage rates are exceptionally low by historical standards — and (at the time of writing) by recent standards, too. Home prices are rising at roughly twice the rate of general inflation. And lenders are much more willing than usual to provide financing to sound borrowers.
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Real estate investing opportunities
We plan to mainly discuss slow-burn forms of property investment. Those are ones that earn you a handsome return over many years or even decades.
But it’s worth mentioning “flipping.” That’s when you buy a home, intending to sell it on quickly (within two years) at a profit. Because that’s back in vogue. In April 2019, CoreLogic reported that flipping is now very nearly as popular as it was at its height in 2005-06. However, flippers today tend to invest more in improving homes rather than just ride rapidly rising home price trends.
But what of those slower-burn opportunities? Those tend to fall into two categories:
- Becoming a landlord and renting out homes to tenants, often over long periods
- Buying a vacation home and renting it to more tenants during particular seasons. You may wish to vacation there yourself and perhaps, ultimately, retire there
Unless you’re very rich, you’ll likely need to finance either of those options.
Show me the money
If you have a lot of equity (the difference between your home’s market value and your current mortgage balance) tied up in your existing home, you may be able to largely finance the deal using that. Indeed, if we’re talking serious money, you might be able to fund the entire purchase of an investment property from that equity.
But, more often, you’ll probably use a cash-out refinance or home equity loan to fund a chunky down payment. And then you’ll need a mortgage to fund the balance of the purchase price.
“Good” borrowing vs. “bad” borrowing
Yes, yes. Cash-out refinances and home equity loans deservedly got terrible reps during the ’07-08 financial crash and Great Recession. But that wasn’t because they were bad ideas in themselves.
It was because too many people were using their homes as ATMs. They were accessing their equity to fund exotic vacations and Hummers and lifestyles that were unsustainable. In other words, they had no thought for the future.
But borrowing to fund a relatively safe investment (no investment is 100-percent risk-free) is a whole different thing. And real estate investing can make your lifestyle more sustainable, not less.
Mortgages for real estate investing
To get the best rates, lenders require the borrower to be the owner-occupier of the home. In other words, you have to live there.
You shouldn’t expect for an investment property the same sort of mortgage deal you got on your main residence.
Naturally, mortgage lenders are still happy for you to borrow for investment purposes. They just want more money. And that’s not unreasonable. They’ll be carrying more risk.
How much more?
You can typically pay in one of two ways:
- On closing — If you put down 20 percent and are borrowing a mortgage that complies with Fannie Mae/Freddie Mac rules, you’ll be looking at $3,375 for each $100,000 borrowed
- Through a higher mortgage rate — Add an extra 0.5 to 0.75 percent to your rate. So if you’d get 4.2 percent on a standard mortgage, expect to pay 4.7 to 4.95 percent on an investment one
Is either one of those scary or easily absorbed by future rents? You won’t know that until you write your business plan.
Write a business plan
For some reason, many think that real estate investing is different from starting any other new enterprise. They see no point in writing a business plan. And it’s true plenty of successful property magnates probably started out without one. But really, why wouldn’t you?
It gives you a chance to think through your strategy. Here are some questions to consider:
- Are you looking for high-end tenants who’ll stay for years?
- Or cheap homes for poorer people?
- Do you want property in downtown, suburban or rural areas?
- How much time can you realistically devote to being a landlord?
- What will it cost you to get professionals to do the tasks you can’t manage?
- And what do conditions in your local sales and rental markets mean for your plans?
The longer you think about these and other key questions, the more you’ll understand the choices you face.
And, as you work through those, you’ll increasingly recognize the challenges and rewards of being a landlord. So you’ll make a better, more informed choice when you come to decide whether to push the button.
And then there’s the math. Cash flow forecasts are at the heart of a good business plan. When will you break even? How much will you make in years two, three and four? What sums should you put aside for periods when the unit’s vacant? How easily will you cover your loan payments? You’ll find our mortgage calculator useful when you’re modeling figures.
Launching any new venture takes guts. But understanding upfront as much as you can about what you’re getting into can boost your confidence and moderate your risk.
True, getting into real estate investing may be less risky than most start-ups are. But that doesn’t mean you can skip your homework.
Get approved for an investment property mortgage
You can apply for an investment property mortgage in the same way you would to buy a house you’re going to live in. Nearly all lenders accept investment property applications.
Get started on your real estate investing goals. In years to come, you won’t be sorry.Verify your new rate (Nov 18th, 2019)