Should I Buy an Investment Property? Where do I Start?
Owning your own home is just the first step to building your real estate portfolio and creating wealth. If you’re thinking about taking the next step and buying properties for investment, here are some reasons why 2021 is a good year to make a move!
Low Mortgage Rates
Mortgage rates are still at a historic low, so investing now could save you money compared to potential rate increases in the future. This means lower overhead costs so that you can maximize your return on investment.
Vacation Rental Demand
Road trips and social distanced vacation homes are popular options for those who don’t want to hop on a plane or visit a resort during their time away from home. An investment property in a popular vacation destination can be a great source of income.
Buying investment property is all about securing your family’s financial future. Real estate provides passive income, tax benefits, equity as you pay off your loan, and can appreciate as the value of your home rises. Real estate is a great investment to hold long-term so that you can call on it when you’re ready to retire.
How Do I Qualify for a Loan on an Investment Property?
If you are buying an investment property that is 2-4 units, it's considered a "residential income property" and the loan is based on the buyers’ personal income. The lender will generally add 75% of the gross income of the property (rents plus possible coin laundry and/or other income producing ) to buyers income for loan qualification purposes. For residential income properties of 5 units or more, it is considered a commercial loan and the bank will look at the income and expenses of the building to see if it is profitable or not, just as if you were buying a business. Therefore, the down payment for 5 units or more will be 30-40% of the purchase price so that the loan payments plus the property tax and insurance will still be less than the monthly income and make it a positive cash-flow property.
The profitability of a 5 units or more income property is generally assessed by calculating the cap rate which is, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property recently sold for $1,000,000 and had an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%. In Los Angeles, a minimum cap rate of 5% or higher is a goal to aim for but not easily achievable.
The pricing of a 2-4 unit income property is generally based on a simple calculation called the GRM “Gross Rent Multiplier” which is the price divided by the gross income.
For example: A $1Million property with $100K gross income would be a GRM of 10. Every neighborhood has an average GRM based on the location and desirability.
How Do I Find an Investment Property?
We are happy to help you with your investment property search of 2-4 units. Or if you are looking to buy out of state or for 5 units or more, we can refer you to some great residential and commercial brokers. Feel free to reach out to Michel@BronRealtyGroup.com / (310)467-8042.