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Buying rental property in 2008/2009
Old 11-21-2007, 06:38 PM   #1
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Buying rental property in 2008/2009

Hi guys! I'm really new to this forum. I don't even know what FIRE stands for, but I think I know what it generally means.

I wanted to ask this question if some real estate, or mortgage, savvy person could help me.

I am interested in perhaps buying a rental property before the real estate market starts to heat up again big time. I'm thinking I will at least have until early 2009 to do this. I really want to get involved with renting out property, and I am willing to be diligent and methodical to make sure I get the right property and tenants.

I bought a condo that I live in this January 2007 and it was before the mortgage climate started getting so wacky! I have a pretty good job and credit score, and I was able to obtain a nice fixed rate mortgage without putting money down (it's NOT interest only). I kept my savings money out of it in a money market, stocks, etc.

Considering how the mortgage situation has changed, I'm thinking it would be much more difficult for me to get the same mortgage I have now, despite the fact I have fulfilled my obligation in every way for the mortgage.

I am of course aware that a lender will check that I have enough income, assets, whatever to support a second mortgage during times when I have zero renter cash flow coming in.

If I was to buy a rental property, how difficult do you think it would be for me to get a loan without a 20% down payment? Are there differences in the process when the mortgage being applied for is an additional mortgage for the person?

Thanks!!
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Old 11-21-2007, 06:49 PM   #2
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Originally Posted by Alex. View Post
Hi guys! I'm really new to this forum. I don't even know what FIRE stands for, but I think I know what it generally means.
Welcome to the forum. This might help: http://www.early-retirement.org/foru...rum-19058.html
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Old 11-21-2007, 06:54 PM   #3
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nobody can say what will happen in a year or more...especially with all the things brewing right now...wars, elections, oil costs, weakening dollar, mortgage fiasco etc

BUT I can tell you that a loan for an investmnent property WILL be much harder to obtain...period. Factor in the lending situation when the time comes.

good luck!
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Old 11-22-2007, 11:36 AM   #4
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I would expect most lenders will want to get 30% down. That's the way it was before the whole planet went ya ya a few years ago. I did it a million years ago by moving out of residence, keeping it as a rental, and starting over with a new purchase residence at 20% down. About four years later I took a second on the first house and bought a second rental using that equity. It was a loan assumption, a second mortgage on the first rental and a personal loan from the sellers mother. If they'd asked me for $100 more at closing, I couldn't have done the deal. I still can't believe I leveraged myself so far, but it all worked out extremely well in the end. I eventually paid off all the loans on the second rental and did a tax-free exchange for an eight unit apartment complex in a very good area of town. The increased cash flow helped a lot when real job disappeared. Now pretend job and rental income keeps the boat afloat until FIRE date, soon.

Start looking NOW. A CPA I know just bought a 3BR-2 1/2 bath home in Atlanta area for $100000, clean and ready to rent out. I expect he'll be able to sell it in less than five years and double his money. I helps if you have the cash or equity to make the deal quickly though. Good luck.
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Old 11-22-2007, 12:40 PM   #5
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Here are some of the issues with residential RE:
Low Yields: Everyone is doing it so yields are insignificant. The typical return you get now is about 3% after all costs. That's less than you get by putting the money in the bank. Yes, there's the capital growth, but you're paying way over the odds for the property in the first place, at the peak of the market, so the growth for the next five years will be minimal or NEGATIVE i.e. you are most likely to LOSE money if you buy now.

Too Much Competition:You are in tough price competition with those who are buying to actually live there, so there are far fewer, if any, deals. (Remember, 95% of houses and apartments are sold to people who want to live there.)

Too Much Time Needed:These property gurus all reckoned I needed to physically view 'only' about 100 properties to find a good deal. What are those guys smoking? Who has time to do that these days?!

Larger Property = Even Lower Yields! The more expensive the property, the worse the yield. This means that 3+ bedroom and executive homes are almost impossible to buy and rent out at a profit (unless you go into the ultra-hassle 'student house' business). Meanwhile, as I've said, there's a truly massive demand for 1 and 2 bed places resulting in the price of these being artificially high. This class of property is exactly that sought by the first-time buyer as well, pushing the prices up even further!

Negative Cashflow!Low rentals means negative cash-flow. This means you are usually paying out money each month, not banking money.

Management and repair fees eat a big chunk of your income. Wide-eyed new investors in this game never factor-in these expenses. You will also end up doing a lot of your own cleaning, decorating etc.

Vacancy/High Tenant Turnover: Your house is usually occupied by a single person who will stay for 6 months typically. So lots of hassle with constantly changing tenants. Often it can seem more like a holiday cottage let than a long-term residential let!

Finding good tenants is a constant headache. And with the very high turnover, this is an ongoing project. The more individual apartments you have, the bigger the headache. Ten apartments can easily turn into an almost full-time job if you do your own tenant-finding, decorating, repairs, cleaning between tenants etc.

Many Properties Needed to Retire: Far from being 'one deal from retirement' you have to buy dozens of these to even have a shot at retiring. And you are hoping and praying for a capital gain which may or may not come soon-if ever.

Tenant Hassle: I spoke to several people who own 10+ apartments and they experience constant aggravation from tenants calling and wanting a light-bulb changed, a leaking faucet fixed etc. etc.

Big Deposits Required: Banks usually demand that you put in MORE than the usual 10% deposit if it's for rental. The minimum you can get away with is 20%-some want 25-30%!

'No Money Down' was a myth! I tried to buy several properties for no money down and was laughed off the phone by the sellers. They'd never heard of such a thing. I Actually Believed What All Those Property Seminars Told Me! "No Money Down?" I was met with stark disbelief and laughter. I'm not saying that nobody has ever, in the history of residential property done a 'no money down deal'-but this has never happened to me or anyone I know in residential property. The more I looked into it, the more fishy the whole thing seemed and the more disillusioned I became. It seemed like some people were making money selling books, tapes and seminars about deals which didn't really happen. I felt conned. I'd wasted a lot of time and I was pretty fed-up.

For more dialog: One Deal
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Old 11-22-2007, 04:57 PM   #6
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Thanks for the posts.

Are there not positive and negative things about every investment tho?

I totally agree that real estate is not easy or risk free, but I think there is a lot of money to be made if done right. Making profit each month, plus gaining equity on a piece of property in a good market like Atlanta sounds ideal.
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Old 11-22-2007, 08:42 PM   #7
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Go to the the "questions and answers" link at Welcome to MR LANDLORD for free rental forms, management software, real estate books and landlord advice to better manage and lease rental property..

Read and read and read to understand what being a landlord entails. If you are up to it, go for it but have your eyes wide open.

I rented out a previous residence for 13 years and the only profitable month/year I had was the month/year I sold it.
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Old 11-23-2007, 12:18 AM   #8
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I talked with a mortgage broker friend today and he said the norm now is to require 30% down for investment property mortgages, plus to have considerable assets, including a reserve to cover a years worth of payments.
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Old 11-23-2007, 01:39 AM   #9
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Quote:
Originally Posted by Alex. View Post
Hi guys! I'm really new to this forum. I don't even know what FIRE stands for, but I think I know what it generally means.

I wanted to ask this question if some real estate, or mortgage, savvy person could help me.

I am interested in perhaps buying a rental property before the real estate market starts to heat up again big time. I'm thinking I will at least have until early 2009 to do this. I really want to get involved with renting out property, and I am willing to be diligent and methodical to make sure I get the right property and tenants.

I bought a condo that I live in this January 2007 and it was before the mortgage climate started getting so wacky! I have a pretty good job and credit score, and I was able to obtain a nice fixed rate mortgage without putting money down (it's NOT interest only). I kept my savings money out of it in a money market, stocks, etc.

Considering how the mortgage situation has changed, I'm thinking it would be much more difficult for me to get the same mortgage I have now, despite the fact I have fulfilled my obligation in every way for the mortgage.

I am of course aware that a lender will check that I have enough income, assets, whatever to support a second mortgage during times when I have zero renter cash flow coming in.

If I was to buy a rental property, how difficult do you think it would be for me to get a loan without a 20% down payment? Are there differences in the process when the mortgage being applied for is an additional mortgage for the person?

Thanks!!
About rental real estate in general, a couple books you may be interested in:

"Building Wealth One House at a Time" by John Schaub, 2005
"The Monopoly Game" by Dave Glubetich circa 1980 or earlier, but concept still valid all these years and tax code changes later. (Try online used book stores and save some bucks---like at half.com/books).


If you are looking to get started with no money down, you may be setting yourself up for disappointment. Some folks may be able to find such deals, but I'd worry more, is the location and the house being what I would choose. Often the no money down deals are there because they couldn't sell the crap any other way. So they suck someone in to a crappy location or house with lousy features/condition, with a so-called "sweet" financing deal.

If you can't make the down now, save up so you can do it later.

And pencil out your deals as to probable rental income vs mortgage payments/property tax/etc. You want to try to avoid cash alligators--negative cashflow--while you are in you low income, wealth building years.
Be diligent with your "pencil" before going in. Don't chase the first thing comes along----look, look, look, and pencil, pencil, pencil---then make offers. Walk away if it doesn't pencil. Sooner or later you will meet the seller properly motivated, and you will strike a deal that solves his problem and yours.

My own theory is to look for 3 bedroom 2 bath homes on the low end of the price range in working class neighborhoods (but not in slum areas). They are most likely to make sense at rents vs purchase price you can get--ie, most likely to not be cash alligators. But pencil them out--it is a cash flow game.

One benefit actually to making a higher down payment--say 30%--is your monthly mortgage payment is lower. Meaning you may get enough rent to pay it for you. You do lose leverage this way, but starting out, it never hurts to be conservative. Some complain, but that 30% if you left in savings would be earning for you. True, but if you figure longterm (emphasis on "long") house prices inflate at 3% annual, compounded, then that 30% you put in earns that house price inflation--but on the ENTIRE 100% value of the house.

As to timing, with the real estate market and prices actually falling in many areas (don't know about Atlanta), the next two years may be as good a time as any in the last several to enter the game.

You sound like you are willing to do the work, put up with the tenant selection job (which will save you tennant hassles later), and do not expect to get rich quick. I think you are a prime candidate to grow your wealth over the next 10, 15, 25 years.
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Old 11-27-2007, 03:53 PM   #10
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The difference in getting a mortgage for your house with no down payment vs. getting one for an investment property is that your house is "owner-occupied", whereas a 20-30% down payment is pretty standard when you are buying investment property. In the last few years, loans got pretty crazy, but even so, the reason quite a few people were able to buy investment property without the standard down payment was because they lied on their loan applications and said they were going to owner-occupy when in fact they had no intention of ever doing so.

If you are determined to put as little money in as possible, the thing to do is to look for a motivated seller who is willing to carry a second for you. Even so, you should be prepared to put at least 15-20% down. And, remember that your goal should be for the property to be cash flow positive (or at least break-even) right from the get-go. Don't get suckered by the theory that it's okay to put up with negative cash flow now, in order to gain LT appreciation down the road. Serious investors know that it's ALWAYS about the cash flow.

Good luck with your plans. I'd advise you to forget what happened in the market in the last few years because that was an aberration. Also, be prepared because being a landlord is pretty unpleasant and there are no short cuts. You'll probably make some mistakes, but I do believe that real estate investing is a great way to gain financial independence.
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Old 12-08-2007, 12:25 AM   #11
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You can make money pretty easily in real estate. Borrow a lot of money for 30 years at a low interest rate (i.e. 6%). Buy a property that you can almost break even on. Try to find a decent property that is low maintenance (this is the hardest part). Find stable tenants and let them pay a little bit below market rent. Pray for inflation. Then have patience and wait 20-30 years. Inflation takes care of the rest. I have millions in loans fixed for 30 years @ 5.25-5.75% from 2002-2003. Inflation is my best friend: it makes debt service less expensive and applies constant upward pressure on rents. The fact that somebody will loan you hundreds of thousands (or millions) of dollars for 30 years at 1%-1.5% above CURRENT inflation (while the future looks even more inflationary) is what makes real estate a nice business to be in. You may be too old to realize the benefits of this, because it is truly a LONG-TERM investment plan, but your kids and grandkids will thank you.

Some tips...You need near-perfect credit and 10% (not 20% and certainly not 30%) cash to put down to score the best rate. Stay below the jumbo cut-off if you can (~ $400k last time I checked). Stay away from areas with more than a 1.5% property tax rate or more than a 5% rental vacancy rate. And nobody buys a rental property, they buy a second home and then decide to rent it out rather than live there...
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Old 12-08-2007, 11:27 PM   #12
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....... it is truly a LONG-TERM investment plan, but your kids and grandkids will thank you.

.......And nobody buys a rental property, they buy a second home and then decide to rent it out rather than live there...
Agree on the "longterm" part for sure.

Your last statement I am not sure how to interpret. Is this advice for OP to say they "are buying for owner occupancy" when applying for loan on a "rental RE" purchase? Or did it mean that is what everyone else does?

Whatever, I would argue it is never smart to submit a fraudulent loan application. While some may and get away with it, others do get caught, and the results are not pretty, as a former friend of mine can attest. Pretty much shut him down, ruined his credit, and reputation for years. The bit he might have saved on loan rate paled in comparison to the damage he suffered.

Honesty in running a rental real estate business is always the best policy in my opinion. Honesty in relationships benefits the landlord/borrower, the tenants, the lender, the city, the potential buyers of the home down the raod, and all concerned.
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