Scott Storace - Branch Manager, 100 Pacifica Drive Ste. 140, Irvine CA 92618 NMLS #226339 949.973.0141

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The First Time Property Investor

Property Investors Weigh Risk & Reward

Property Investors Weigh Risk & Reward

Orange County, CA – It’s April, and that means changing weather, Santa Ana winds, and typically dozens of brand-new “For Sale” signs going up in your area. The “For-Sale” signs are limited this year. This is undeniable proof that the housing market has recovered after five long years. If you’re looking to expand your real-estate holdings, this is a great time to diversify your investments. There are challenges to managing multiple mortgages, however, and they’re worthy of investigation before you turn from homeowner into property investor.

 

Flip, or Hold?

The two basic choices in front of a potential property investor in real estate are: do you get a property you can quickly improve upon and resell at a profit (“flip”)? Or one that will appreciate in value over time as you rent it out for an income stream (“hold”)?  Flipping is risky, especially for a first-time property investor. But when it pans out it provides profits much quicker than holding.  Holding means using the rent payments to pay off the mortgage and making a very modest monthly profit until the mortgage is paid off. Depending on your risk tolerance, either one can be a solid choice.

 

Qualifying For Your First Investment-Mortgage Product

Mortgages for investment properties have more stringent qualifications than owner-occupied mortgages. They represent a bigger risk to the lender. You can expect to bring to the table:

  1. 20% down payment at an absolute minimum. Many banks are asking for 25%-30% down for investment properties.
  2. A minimum credit score of 620 or greater depending on the strength of your financial situation.
  3. Enough cash on hand to make up to six months’ payments on both your existing primary-residence mortgage and your new, investment mortgage.
  4. Proof of steady income. Two years worth of W-2 statements or self-employment income verified by a CPA will show the bank that you’re earnings are consistent.

 

If that huge down payment has you wincing, first-time property investors have another option: live in your new home for a year before you start renting it out.  By starting as an owner-occupant, you qualify for conventional and government loans that can require as little as three percent down. You can also use the equity you’ve built up toward a down payment on an investment property.

Another strategy amongst property investors is to move into a home that you plan to fix up. If you live in the home for a minimum of 2 years before selling it, then you can take advantage of special IRS rules that reduce and may even exclude the capital gains tax.

 

Managing Properties and Mortgages

One of the biggest risks for first-time property investors is failing to manage two mortgage payments at once alongside the other expenses that come with being a landlord. A single late payment on an investment mortgage can drive your credit rating down. That can cause ripple effects that make your financial situation suddenly much worse than you anticipated.

 

A financial advisor can help you set up a budget and automatic payments that will go a long way to making sure you don’t ever end up in that situation. If you’re considering your first investment property, you might well consider hiring such a person to be an ‘investment in your investment’ — and a good way to keep your money safe.

 

For mortgage related questions about investment properties give me a call. We can help with flips or holds. Just give us a call or send an email.

Scott Storace

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