Although, historically, owning a real estate investment is considered a quality and relatively safe vehicle, doing so requires some knowledge, understanding, planning, and carefully choosing the right / appropriate property! After more than 15 years, as a licensed real estate seller, in the state of New York, and someone who, on several occasions, has invested in residential rental properties, I strongly believe that it is important and significant, for potential investors, Pay special attention to these 6 basic principles, about the realities, etc., to do so. With this in mind, this article will briefly attempt to consider, examine, review, and discuss these.
1. Initial payment, generally higher: When you buy a multi-family home, unless you live there, lenders look at it differently, from the perspective of how much down payment is required, if a mortgage is used, as part of the purchase. While the rules and conditions often differ, the typical conventional mortgage for a single-family home is 20%, but for a non-owner-occupied one, it is 25%.
2. Additional requirement / income / expected income / cash flow: Lenders typically base their decisions on appraised value and a set of numbers, ratios, etc., when offering mortgages for a single-family home, which are believed to represent the borrower’s ability to pay, etc. However, in multi-family scenarios, a key requirement is based on anticipated income, rents, anticipated income, and cash flow. This is done to minimize the risks of the lender!
3. All costs: Know all the costs of owning and operating the specific property, right from the start. These considerations should consider: the landlord’s responsibilities for property taxes, utilities, maintenance, repairs, income, cleaning between tenants, maintenance of common areas and / or grounds, etc. All of these expenses need to be factored into the decision to purchase a specific property!
Four. 6% rule: A smart rule of thumb, I call it the 6% rule. This means that income (expressed, conservatively), minus all costs of ownership (paid monthly or averaged, that way), is cash flow. This means, unless / until, the true cash flow is at least 6% positive.
5. The 75% occupancy guide: When, calculating the anticipated income, take into account, the vacancies will occur and be prepared. Therefore, after determining income, using market rates, rents, reduce the number, to 75%, to account for this contingency.
6. Ease / requirement to rent: Consider the specific real estate / rental – housing market, and whether it is difficult or challenging to rent, when there are vacancies. Find out how long, on average, it takes to rent similar units in this geographic area.
Position yourself, to make the wisest real estate decisions, considering, at least, these 6 relevant factors, before investing in a specific property! Will you proceed, with discipline, to being a wiser buyer / investor?