Investing in Real Estate Profitably: Financing Options for Purchase of Rental Houses, Part 1.

This is not an article about tricks for 100% (no money down) financing. Even if you do take advantage of various no money down strategies from time to time, these strategies are not generally applicable when you begin investing systematically in multiple rental homes with the goal of making significant rental income.

This is because some of these strategies require a degree of deceit and careful timing, others require difficult-to-find pricing or seller situations, and others require sophisticated legal instruments and training, or a combination of all of the above. These complex strategies are good for selling mentoring programs, books and training courses.

However, none of these methods are practical, in our opinion, as a consistent practice for profitable and stress-free ethical investing. For a consistent winning program of investing, you want to be able to act quickly, repeatedly, openly and consistently, which will enable you to build up a portfolio of rental properties in a relatively short period of time.

It is therefore much more profitable and sensible in our opinion to play it safe and keep it simple. This means to focus on obtaining good investments from the point of view of future rental income and appreciation, and pay whatever down payment the banks require.

Simple as that. If you do this, you will be able to build up a portfolio of properties quickly.

You can still get very good loan deals by shopping around for financing, or by using an independent loan broker. Make sure your loan broker shops around on your behalf. Standard bank financing at good interest rates generally needs only a 5% to 10% down payment for investment property, which is not very much in the big picture.

Unless you are going to flip a property quickly, you probably want to maintain positive cash flow for most of the time you own a rental property. This is true even if you eventually plan to sell the property at a profit. After all, you never know how long you may have to hold the property before its value appreciates significantly, particularly if you have to survive the inevitable down turn in property values which can last a year or more. The only way to ensure you can comfortably hold the property as long as you need is to have positive cash flow each month.

To this end, consider the advantages of paying a full 20% to 25% down payment. This will allow you to qualify for the lowest interest rate programs. Lower interest rates mean lower monthly payments, which mean positive cash flow. In fact, with a 20% to 25% down, you may qualify for so-called "payment option loans" with minimum payment rates as low as 1%. With these loans, the minimum payment stays low for the first 5 years, with a payment increase cap each year of just 1.075 times the previous year's monthly payment. At these levels, you will almost assuredly achieve a very good positive cash flow.

With such minimum payment loans, you still have to pay the current adjustable rate (usually around 4.5% today). However, most of the interest is deferred. At the end of 5 years, the deferred interest is added onto the loan balance. This will probably be much less than the property has appreciated. Therefore, it is a small price to pay for the positive cash flow gained during the first 5 years.

Another option readily available today is "interest only" payments. The "payment option loans" described above usually include an interest-only option. That is, each month you have the option of paying either the minimum payment described above or an interest-only payment. Other loans do not have the minimum payment option and have only an interest-only payment option. In any case, when you make an interest-only payment, you are paying only the interest for the month, and not paying down the principle. This reduces your monthly payment allowing positive cash flow in most cases, but of course you do not build up any equity in the property.

As a general rule in most states, most loans are available with interest-only options nowadays. Sometimes you have to pay a small fee at closing for this option (typically .125% to .250%) and sometimes there is no charge. If there is no charge, you may find that the interest rate is a little higher. You just have to shop and compare loans to get the best deal, as stated earlier, or make sure your independent loan broker is shopping for you.

Here is a comparison of three monthly payments plans

1) A typical minimum payment (in a payment option loan)

2) An interest-only payment (in a payment option loan or any interest-only loan)

3) A fully-amortized payment (in which you are paying down the principle a little each month.)

For a $200,000 loan, a 1% minimum payment is $643 per month. By comparison, a typical 4.5% interest-only adjustable rate loan produces a monthly payment of $750. Lastly, a fully amortized 4.5% payment is $1013.

You can see that the minimum payment and the interest-only options are low and fairly close but the fully amortized loan can make a significant dent in your cash flow.

Beware that the minimum payment in a payment option loan and the interest-only option in any loan program lasts (generally) for only 5 years. However, there are interest-only loans where the interest only option lasts 10 years. The latter is preferable if your intention is to hold the property for more than 5 years without refinancing.

Beware also that, in order to get the low interest-only rate I have used in the example above (about 4.5%), you would need to accept an adjustable rate mortgage (ARM) program where the rates adjust annually or even more often. If interest rates jump significantly in the next two years, you could get stuck with a relatively high payment.

We are recommending for most borrowers who plan to hold properties for more than a year or two to either:

1) Obtain a "payment option loan" as described earlier with minimum payments that last a full 5 years, or

2) Obtain an adjustable rate mortgage (ARM) loan with an initial fixed interest period of 5 years. This will cost 1% to 2% more in rate, but the insurance is absolutely worth it, in our opinion, at this time in the real estate cycle.

This article has reviewed some modern strategies for minimizing your loan payments when purchasing investment rental homes. There is much more to say on this topic. So keep an eye out for additional articles by the same authors on this and related topics.

(c) Copyright 2004, Jeanette J. Fisher and Robert S. Kramarz. All rights reserved.

Jeanette Fisher, Design Psychology Professor, is the author of "Doghouse to Dollhouse for Dollars: Using Design Psychology to Increase Real Estate Profits," the only book to reveal interior design secrets on how to make top dollar investing in real estate. For real estate and interior design psychology books, articles, tips, and newsletters: http://www.doghousetodollhousefordollars.com.

Robert S. Kramarz is a loan officer for a major loan brokerage. He has over 20 years experience in finance and business management and comes from a family a long background in real estate investing and banking. He specializes in providing financing for purchase of investment real estate. He can be reached by email at MrFunding@22cv.com. Further information is available at the website http://www.sweetloan.info.

---

Understanding Real Estate Terminology

Purchasing a home can be a complicated and confusing process,... Read More

Invest In Real Estate - But Where?

Where should you invest in real estate? If you know... Read More

How Do I Fix Up a Home to Sell?

The first thing you need to do is stop thinking... Read More

Landlords Dance The FICO Fandango

Fair Isaac Corporation is the creator of the FICO credit... Read More

Home Inspectors: 5 Tips to Choosing the Right One

Choosing the wrong Home Inspector can cost you a lot... Read More

Why Canadian Real Estate is Such Good Value

Real estate agents, Canadian citizens and foreign investors interested in... Read More

Real Estate Investing In Mexico

Mexico is CHEAP! But its getting more expensive. As property... Read More

Family Feud with an Auction Deadline ? Adventures in Probate/ Estate Purchases

One of our investor students told us of an interesting... Read More

How to Buy Fixers for Profit

Do you dream of becoming a multi-millionaire real estate investor?... Read More

Homebuyer Heaven Can?t Possibly Last

With interest rates at record lows over the past year,... Read More

How to Find and Buy a Bargain House with Little or No-Money Down

Real estate investors know how to make money buying distressed... Read More

You Dont Need Health Insurance!

Seems almost every situation in our lives is centered on... Read More

Real Estate Investing - The Motivated Seller

How the heck do you find a "motivated seller?"The motivated... Read More

Hurricane Katrina And The Impact On Real Estate Prices

In the wake of Hurricane Katrina's wide path of destruction,... Read More

3 Strategies For Buying Property With No Money Down

Everyone has heard a story or read about someone who... Read More

Are Signs Important?

Signage, though quite fundamental in nature, plays an important role... Read More

Dont Forget to Ask About Restrictive Covenants

Homebuyers, especially first-timers, may not think of asking about restrictive... Read More

Buying A Home ? Rain, Sun, and Weather Issues

When buying a home, it can be easy to overlook... Read More

How to Own a Dream Home in Spain

Every year hundreds of thousands of foreign visitors travel to... Read More

How To Get Started In Preconstruction Investing?

Through our website the most common question that we receive... Read More

NAHB?s Voluntary Model Green Home Building Guidelines

The voluntary Model Green Home Building Guidelines are designed to... Read More

Real Estate Investing: How to Choose a Lender

To become a successful real estate investor it's vital to... Read More

How Can I Stop Foreclosure on My House?

We understand the being in foreclosure is a scary thing.... Read More

The Real Estate Bubble Fallacy

There has been a lot of talk lately about the... Read More

Big Discounts With Property Investment Clubs?

A stagnant stock market, low interest rates and booming property... Read More

Property Investing Secrets 9

Property Investing: Here Are Two Important Tactics You Must Do... Read More

Spain Excellent Choice for British SIPP Investors

Second homes in favourite holiday destinations such as Spain are... Read More

Juggling The Day With A Deal

Doing deals with sellers is why you went into lease... Read More

Selling by Owner Tips

Do strangers scare or intimidate you? If you're planning to... Read More

Maltas Market Battle

With new destinations such as Bulgaria, Slovenia and Croatia offering... Read More

Fixing Houses: Using Psychology for Profits

Real estate investors who specialize in fixing houses for profit... Read More

Real Estate Investing - Maximum Leveraging of Your Money

At this moment, you have access to some amount of... Read More

Sell Your Income Property For More

Selling income property isn't like selling a house. You can... Read More