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Investing in a rental property can be a very rewarding experience with low cash investment and good long-term equity builds up. Even positive cash flow can be generated over time with low down. Investing can also be a bit scary for a first the time investor with concerns of vacancy and repairs in the forefront.
Down payments of 5% are realistic provided you have a high credit score (over 700 fico). If your score is lower than 700 then the down payment increases and or an interest rate increases is needed.
Cash Flow: To obtain cash flow in today’s market one of two programs will fit your needs.
1. Low Down Payment: An adjustable or flex type mortgage is needed. These loans allow for a combination of payments. Either interest only (30yr or 15 yr) with payments every month. The goal with this type of mortgage is to pay as much of the cash flow as possible towards the loan balance as you can. This will greatly reduce the principal amount of the loan and give you the flexibility to make lower payments during the rent up period. Or, if you need, free up a few extra bucks for repairs. I recommend this for only the disciplined investor.
2. Medium to High Down Payment: Here you have a choice of loans and it will depend upon what your goal is. Cash “flow now” or “free and clear” as soon as possible. In either case you will have a choice of fixed rate or interest only/adjustable rate. Both have pro’s and cons.
Renter stability: One item that many investors overlook is renter stability, or turnover. If you are constantly turning over tenants you are expending time, energy and money re-renting the property. The best rent to stability ratio for single-family homes can be found in the 150-225K price range with select oportunities in the $235-$275K price range. This would be a single-family home in nice area with good tenant retention and appreciation. Multi-family homes typically have a different stability ratio. I have found at the typical apartment, a tenant is there 8 months, while the average single-family home tenant is there nearly twice as long. The upside to multi-unit investment is that if a unit is vacant you are not 100% vacant.
Boise area prices: Prices vary in the Boise area from $100,000 on up for single family homes.
Multi family properties are also available and the financing is similar with duplexes, starting at about $165,000, and 4 plexes in the mid 300’s and new 4 plexes in the high 300's to low 400's.
The scenarios of each investor are uniquely different and are impossible for me to review all the topics here. If you think this is something you would be interested in talking about please give me a call. I would be happy to review the different options that are available.
Terms: Low Down Payment: 0-19% down Medium Down Payment: 20% or greater.
Gross Rent Multiplier:
The Gross Rent Multiplier (GRM) formula for value is as follows:
Value = Annual Gross Income X Gross Rent Multiplier
For Example:
$102,600 = $11,400 (Potential Annual Gross Income) X 9 (Gross Rent Multiplier)
The Gross Rent Multiplier or GRM is a ratio that is used to quickly estimate the value of rental properties. Just two pieces of information are required to calculate GRM for a property, the sale price and the total gross rents. The higher the GRM, the better the return.
The Capitalization Rate:
The Cap Rate is calculated as follows:
Cap Rate = (Net Operating Income / Market Value) x 100
Cap Rate = (NOI / MV) x 100
I typically do not use cap rates in analyzing small investment property. As accurate and consistent NOI (Net Operating Income) figures are next to impossible to obtain.
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