Identifying and Purchasing your property
The first thing you must do when determining what type of property to pursue, regardless of your tolerance of risk, is to first understand your purchase power. Are you paying cash or getting financing? If you’re paying cash, it’s easy to determine your price point based on how much cash you have, but if you are getting financing, it gets more complicated. The next question is, are you living in the investment as your primary residence or renting it out as an investment? The financing rules and rates change for ‘owner occupied’ vs ‘investment’. For example, in an ‘owner occupied’ situation for single families, 2 families and even some 3 and 4 families/mixed use buildings, you can put as little as 3.5% down via FHA (stands for Federal Housing Administration) which is insured by the government. The same is true for condos, assuming the building is FHA approved. As a result of the 2008 housing crash, on February 1st, 2010, FHA did away with individual condo ‘spot approvals’ and now whole buildings must be FHA approved in order to qualify for an FHA mortgage. When buying as an ‘investment’, on the other hand, in most cases, you will be required to put down at least 25% via Conventional and FHA loans are no longer an option. If you would like more information and details regarding which types of mortgages you qualify for, please contact one of our preferred lenders on the Concierge tab.
After assessing your purchase power, you must now identify your tolerance of risk and what type of property that will suit those parameters and risk level.
Each property type has its own unique characteristics, and within them, you must remember to consider your tolerance of risk as this will determine the type of tenant you want to rent to. For example, if you want to earn a higher return, you may want to seek an investment in a lower income area where the risk is greater, but so is the potential return. If all goes as planned, your return could be great, but if the tenant has trouble paying the rent and or the neglects the property, things can start to go south fast. On the flip side of that, if you want something with less risk, you may seek a rental in a high income area where prices are higher but so is the stability. You will sacrifice your return as a result by paying top dollar for that stability. The play here is not so much the Cap rate (will explain what Cap rate is in next segment), but rather the land value and potential appreciation just being in that prime location.
The type of property you desire will depend on a number of factors such as the amount money you have to invest, your tolerance for risk and the general areas that you would like to own in. Selecting a Realtor with experience in Investments is worth their weight in gold. We here at Sanderson Real Estate Group will be able to guide you through different type of properties and the pros and cons of each. In Residential Real Estate, your investment type could be a Condo/Townhouse, Single Family or Multi-Family (2-4 Units) and land. In Commercial, it will be 5 or more units, mixed used building, and industrial With each type of property, you must consider the potential expenses going forward before getting an accurate estimate on your return. We can help you determine the potential income and ongoing expenses with any particular property.
Determining the Potential Rent
We here at Sanderson Real Estate Group average over 100 sides in rentals every year and thus understand the market values better than most. We can help you determine, very quickly, the fair market value of any rental property including those you are considering purchasing. When looking at a potential investment, not only will we educate you on what the fair market values is, we will also provide you with the pro-forma picture including the specific rent control laws of each town, so you are equipped to make an informed decision on the investment at hand, and whether or not it’s one you should consider pursuing.
Determining the Potential Expenses
Every property has its own unique expenses. We here at Sanderson Real Estate Group will assist you in getting an accurate picture of what those expenses are and will be of the property you’re interested in. The most common ongoing expenses are; mortgage, taxes, insurance, utilities (gas, electric, heat and hot water), water/sewer, vacancy and potential management expenses. We here at Sanderson Real Estate group have also assisted landlords manage their property. Please feel free to talk to us if that is something you are considering and we can see if we are a fit for you.In addition to ongoing expenses, there may be some immediate expenses upfront to renovate (rehabilitate) and get the property in a more livable state which we will also point out to you.
Once you have determined your potential rents along with upfront and ongoing expenses, you can take that information and make an educated decision to move forward or back away from that property. Another way to determine this is to find out what the going Cap Rate is which I will cover in the next section…