Turning to real estate for investment purposes is nothing new. In fact, when other markets are underperforming we tend to see a lift in clients seeking alternative investment strategies. Real estate, unlike other investments tend to be a little more familiar and comforting to the average investor. Most people investing in real estate have bought a home before, gone through the process and can relate to paying rent or how real estate appreciates in value more so then other investments.
Examples of real estate investment strategies we see often include:
-Buying properties to rent out
-Purchasing Pre-Sale Development to sell or rent in the future
-Purchasing property to build or do major renovation and sell
-Investing your money in the private mortgage marketplace, becoming the lender.
Although we finance all 4 of these investment vehicles with mortgage products we are focusing on clients purchasing and renting in this blog and will touch on the others in future blogs.
Clients purchasing to rent need to figure out a few things:
1. Are they purchasing under their own name or a corporate name. This should be considered with the advise and support of an accountant or lawyer. From a lending perspective its important to note that some lenders have an appetite to lend with a corporate name on title with the client providing a personal guarantee and other lenders do not. You can't assume, when having a corporate name any lender with finance the property.
2. What is your purchasing power. Getting pre-approved to some degree to understand what you qualify for. It helps understanding what the lenders rental offset is - meaning how much rent the lender takes into consideration when buying a rental and also knowing if the property requires a lease or can use market analysis (appraisal) to provide hypothetical rent for consideration. Pending how strong the income is and how many properties owned the difference in a rental offset may determine how many properties one can own.
3. Pricing is important. Understanding the rates to help determine cash flow. Most lenders charge a premium, be it small premium of 15bps or so, the rates available "online" may not be accurate and can adjust your cash flow analysis.
4. How many units or doors will a lender finance under their rental program. Clients often assume lenders have unlimited funds for investment properties but lenders may cap the amount of units or properties with that particular lender. Understanding this helps create a strategy in terms of where to place mortgages and who to work with.
5. Know your broker/banker. Not all brokers and bankers are equal. Not all understand rental offsets, which lenders allow purchases under corporate names, which lenders are or are not charging rental rate premiums. As always, ask questions when considering who to work with . What is the broker/bankers comfort level working with rental properties, putting together rental worksheets and do they have rental clients. Working with someone that finances a lot of rentals, I believe, gives you a better opportunity to create that rental portfolio you dreamed of.