ll we hear today, in the newspapers, on TV and on the radio is that the real estate market is slowing, leveling off, or even possibly taking a downturn. So how could I be recommending that you jump in feet first?
I believe this changing real estate market is ripe with opportunities. People who own one or two investment properties (the people making up the “mom and pop” sector of the real estate investment world) should be getting ready to take advantage of opportunities that will arise in the next several months.
Prices should adjust downward some as the inventory for two- to four-unit complexes increases. When the market is “hot,” the pricing on this type of property is driven up by the frenzied market, similar to single-family home prices. However, prices on these properties will come down, as common sense prevails and inventory builds; and these smaller-unit complexes are great for the small investor. Why? They can be financed with conventional loans and are also treated much more favorably by the insurance companies and government regulations. If a property has more than four units, it is treated as a commercial enterprise, so it is much more expensive to finance and insure, and more strictly regulated by cities and counties. On two- to four-unit properties, lenders usually allow you to put less money down than is required on the over-four-unit complexes as well.
So what does all this mean for you? Well, if you can find residential investment properties that will provide cash flow without any loss for about 35 percent down, you may want to buy. And … you may not even need to put that much down, since lenders will allow as little as 20 percent down on nonowner-occupied multiple units. You may, however, need to be prepared to dig into personal and/or other properties’ income to offset payments when leveraging with the smaller down payment. Interest rates are quite good right now, in the mid-7 percent range for investment properties, and will usually run about 1 percent higher than a regular owner-occupied home loan rate, depending on qualification standards like credit, amount down, etc.
The other good news is that rents are on the rise. Because many would-be first-time buyers are being forced to rent, the number of rentals will be reduced, and rents will most likely increase in the next year or two.
If you have owned another investment property for several years, do not need the taxable positive cash flow it is creating today, and desire to build wealth with real estate, then now is the time to consider buying another property. You may want — after checking on future tax consequences, of course — to pull a reasonable amount of money out of your present property by refinancing and buy another. In effect, this is like getting a property for free. To leave your current equity, which probably increased rapidly over the past decade, underutilized would be wasteful. It would be wise to make that profit work for you.
You can’t always buy low and sell high, but you can be wise and prudent by using the opportunities that arise and the tools you have in creating wealth with residential real estate investments.
11-01-2006
