• CONTACT US • RELATIONSHIP LENDING • MAXIMIZING CREDIT SCORES • 100% INVESTMENT PROPERTY FINANCING • JOINT VENTURES
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• CONTACT US • RELATIONSHIP LENDING • MAXIMIZING CREDIT SCORES • 100% INVESTMENT PROPERTY FINANCING • JOINT VENTURES |
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Investors who buy properties to sell within a few years are what I refer to as "Speculative Investors". Regardless if one buys at par in an appreciating market, buys at a discount or purchases distressed properties, their objective is to sell the property for a profit in the near future. This may mean immediately after the completion of renovation, or possibly in a couple to a few years to capitalize on a current or soon to be strong market.
In the interim, these properties are usually "Rented" or "Lease Optioned”, until such time as they are sold. The payment generated by your note rate will determine the monthly cash flow of a property. Investors, who are "Cash" wealthy, may consider parting with a 15-20% down payment in order to obtain the lowest rate, therefore generate the highest levels of cash flow during this interim period.
The problems is, most investors do not have several hundred thousand dollars to use as "Utility" money for down payments, and even those who do, choose to part with very little or no down payment, understanding that investing by leverage will ultimately lead to higher returns on their investment (ROI) or "Cash on Cash". This is further discussed in our section that describes 100% Financing.
Having said that, most should choose the lowest possible rate that is available for the type of loan they are obtaining. One should never pay points to "Buy-down" a rate, as capital used to buy down a rate can be used to purchase more property. And even then, what is the interest payment difference between a 7% rate and an 8% rate on a typical $100,000 investment? $68 per month or $816 per year, give or take a few cents. If it costs 1 1/2 points ($1,500 on a $100,000 loan) to buy the rate down 1%, your break even period is 22 months. This means, if you sell the property within the first 22 months, the money used to pay down the rate has gone down the drain. On a typical $100,000 investment your return upon sale should be no less than $115,000 - $120,000 after 12-months, if not much more. By using 100% financing, wouldn't it make more sense to take the $1,500 in money used to buy down your rate, and purchase another $100,000 property? So instead of saving $816 in annual interest, you are generating another $15,000 - $20,000 in profit. That's the potential awarded by leveraging your dollar.
In conclusion, select the lowest rate available for the loan you are qualifying for without paying any "Buy-down" points. If your property cannot cash flow then it probably isn't worth its weight in gold. There are several exceptions to this rule as well as "Strategies" to offset negative cash flow. For one, if market rents dictate a fair rental rate of $800 and your mortgage payment is $900, look to your equity growth for means of justification. If you are destined to earn $20,000 in profit, who cares about a $1,200 annual rental loss? That still amounts to a net profit of $18,800.
In addition, other properties within your portfolio generating positive cash flow can be used to offset a monthly loss on a certain property. After all, it's the combined efforts of your portfolio that is the key...not the monthly gain or loss of any one particular property.
Other strategies employed to help offset negative cash flow are discussed on a one on one basis with the advisors at Progressive Companies..
Investors who intend to hold on to properties for longer term purposes should be more concerned with interest rates. Naturally so, an $816 annual loss over several years can amount to several thousands of dollars. As in the above examples, excess down payment can be used to reduce monthly debt service. For those unwilling to part with or do not have excess capital, choosing the right property becomes a more important factor. I'm a firm believer that if "Cash flow" properties do not cash flow with 100% financing, let alone 80% - 90 % then why are you even considering it to begin with? It's time to move on to another property.
Contrary to popular beliefs, most "Multi-Unit Cash flow" properties are not designed to appreciate, as their market values are determined by an income & expense approach, which originates from the "Market Rents or Cost of Living" for a particular region, and not the demand for Real Estate by the general public. Having said that, there is limited potential for growth; therefore income generated must be generated on a monthly basis by means of maximizing rental rates and minimizing operating expenses, including your monthly mortgage payment (Interest rate).
In conclusion, select the lowest rate available for the loan you are qualifying for without paying any "Buy-down" points. If you cannot generate cash flow, then move on to another property as these types of properties offer limited equity growth potential to offset any monthly losses. If you are "Cash" wealthy, you may consider buying down your rate and/or injecting a larger down payment.
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