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Despite the declining real estate picture, this is one of the best investor markets we've seen in years. As a national rehab lender who works specifically with real estate investors, we're advising our customers to consider the following when analyzing potential investment opportunities:1. Consider property size and the potential future sale
Due to a huge surplus of inventory, first time home buyers now have many more options. Those who used to buy smaller "starter homes" that needed work can now purchase larger homes in better condition.
As an investor you need to know your market. It is very important to make sure that the house you plan on selling or renting appeals to the largest population of buyers/renters. One mistake that many investors make is purchasing a property that is too small - with the amount of options and the decrease in housing prices, investing in a house under 1000 square feet will drastically reduce the amount of potential buyers. Along with this, it is important to consider finding properties with at least four bedrooms to accommodate your average three to four person family - it is important for each to have their own bedroom with the potential extra room as an office; be aware of the importance of the master bedroom being able to fit a queen or king size bedroom set.
2. "Location, location, location" is more important than ever
With foreclosed and reduced-priced properties available throughout Massachusetts, including upscale towns and neighborhoods, first-time buyers have more choices than ever. This resulted in residential properties located on busy main streets or near commercial centers not selling or renting well. These types of locations may not be the best choice regardless of your exit strategy. The key is to find the worst home in the best neighborhood.
In this market, many investors are choosing to keep their properties long term instead of selling them. With this in mind, when purchasing for long term investment purposes, you need to think of the type of tenant that will be attracted to the property.
3. Know your market and your numbers
We advise our real estate investors that they really get to know their markets - including distinct neighborhoods within larger markets. To be successful in your market, you should know:
4. Get fully approved, not pre-approved
In this market, time is of the essence, especially with rehabs, since the value of the property can decline while you're rehabbing. With a conventional lender, you're apt to wait weeks to get approved for a loan, all the while being asked to jump through hoops - only to learn your loan is kicked out due to not meeting guidelines.
Sellers want to see that you are real and that you have the financing to back up your offer. Reputation is everything in this business and with financing being more difficult to find, sellers want more substance with an offer. If possible, get fully approved, not pre-approved, before you even find a property. This means you can be in and out of a property sooner rather than later. You can usually get fully approved if you're using a hard money or rehab loan lender.
5. Consider alternative forms of financing for rehabs
Conventional lenders are no longer handing out money to real estate investors who want to purchase properties that need rehabbing. If you've struck out with conventional lenders, consider a rehab loan.
There are many benefits in getting a rehab loan. The loan is being lent to your business entity which protects you as an individual, while traditional lending will require you to close in your name. Most traditional lenders are not doing any type of loans where the property requires any type of work. If you do find a lender that will consider lending on this type of property your out of pocket on closing will typically be 20-30% and the repair work will have to come from your pocket. Once you consider monthly interest payments and points up front, your return on investment will be very low. A rehab lender may expect a similar amount down (on average 20%), however at least half of your down payment will be returned to you when you sell or refinance the property. Also the points, the interest, and 100% of the rehab will be included in the loan reducing your out of pocket and helping you leverage your capital.
Unlike most hard money loans, which are based on a hard asset, a rehab loan is based on an individual's credit file. The loan application is a full doc process and interest rates are higher - right now they're at 14.99 annual percentage yield.
However, rehab loans are usually short-term (usually three to six months), so the interest breaks out to 1.25% a month, and they generally have six months of interest built into the loan, so you don't have payments during the life of the loan. You are then credited back any interest once you sell the property and pay the loan in full.
Be sure you are partnering up with a lender that has experience, is interested in your business model, is looking to set you up for a long term relationship, and most importantly has available capital to lend.
With as many foreclosures in the market there are many opportunities to choose from. Know your market and numbers, have an exit strategy, and consider alternative sources of financing, such as a rehab loan.
With foreclosed and reduced-priced properties available throughout Massachusetts, including upscale towns and neighborhoods, first-time buyers have more choices than ever. This resulted in residential properties located on busy main streets or near commercial centers not selling or renting well. These types of locations may not be the best choice regardless of your exit strategy. The key is to find the worst home in the best neighborhood.
In this market, many investors are choosing to keep their properties long term instead of selling them. With this in mind, when purchasing for long term investment purposes, you need to think of the type of tenant that will be attracted to the property.
3. Know your market and your numbers
We advise our real estate investors that they really get to know their markets - including distinct neighborhoods within larger markets. To be successful in your market, you should know:
- Details about the neighborhood including schools, potential new zoning, or major construction (i.e. a new highway on ramp, commercial development, etc.).
- Your profit is determined by your purchase price. To determine what you should be buying the property for, you must have a solid understanding of what properties are selling for in that market. The best way to establish what the property is worth is to find like properties within 0.5-1 mile radius sold within the last two months. You need to be sure that the price you're listing your property for is how much you think it will be worth if sold in under a month.
- The condition of other properties in the neighborhood. Your goal is to have the nicest house in the neighborhood selling for the least amount.
- You must also factor in the total cost to rehab including carrying costs and hold time. We estimate that for every $10,000 you have in rehab it should take you no more than 1-2 weeks to complete. Be sure to get a couple quotes from reputable contractors and check with their references; have them sign contracts with penalty clauses for delays.
- Your exit strategy whether you'll buy and hold, flip, lease to own should depend on the neighborhood that you are investing in.
4. Get fully approved, not pre-approved
In this market, time is of the essence, especially with rehabs, since the value of the property can decline while you're rehabbing. With a conventional lender, you're apt to wait weeks to get approved for a loan, all the while being asked to jump through hoops - only to learn your loan is kicked out due to not meeting guidelines.
Sellers want to see that you are real and that you have the financing to back up your offer. Reputation is everything in this business and with financing being more difficult to find, sellers want more substance with an offer. If possible, get fully approved, not pre-approved, before you even find a property. This means you can be in and out of a property sooner rather than later. You can usually get fully approved if you're using a hard money or rehab loan lender.
5. Consider alternative forms of financing for rehabs
Conventional lenders are no longer handing out money to real estate investors who want to purchase properties that need rehabbing. If you've struck out with conventional lenders, consider a rehab loan.
There are many benefits in getting a rehab loan. The loan is being lent to your business entity which protects you as an individual, while traditional lending will require you to close in your name. Most traditional lenders are not doing any type of loans where the property requires any type of work. If you do find a lender that will consider lending on this type of property your out of pocket on closing will typically be 20-30% and the repair work will have to come from your pocket. Once you consider monthly interest payments and points up front, your return on investment will be very low. A rehab lender may expect a similar amount down (on average 20%), however at least half of your down payment will be returned to you when you sell or refinance the property. Also the points, the interest, and 100% of the rehab will be included in the loan reducing your out of pocket and helping you leverage your capital.
Unlike most hard money loans, which are based on a hard asset, a rehab loan is based on an individual's credit file. The loan application is a full doc process and interest rates are higher - right now they're at 14.99 annual percentage yield.
However, rehab loans are usually short-term (usually three to six months), so the interest breaks out to 1.25% a month, and they generally have six months of interest built into the loan, so you don't have payments during the life of the loan. You are then credited back any interest once you sell the property and pay the loan in full.
Be sure you are partnering up with a lender that has experience, is interested in your business model, is looking to set you up for a long term relationship, and most importantly has available capital to lend.
With as many foreclosures in the market there are many opportunities to choose from. Know your market and numbers, have an exit strategy, and consider alternative sources of financing, such as a rehab loan.
Brian Falkowski is a National Account Manager for Brookview Financial, a national rehab lender. You can reach Brian by phone at 877-734-2211 x 316 or by email at: bfalkowski@brookviewfinancial.com You can learn more about the company by visiting www.brookviewfinancial.com.
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