Stewart Brown Jr – Mortgage Loan Originator – Purchase or Refinance

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Throughout the decades one asset class continues to provide the greatest source of wealth accumulation for investors.

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With a multitude of investment options available today, it can often be confusing on where to start.  The best approach is to diversify and have a long term horizon.  One investment that stands out and has stood the test of time is real estate.    

 

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By using a trusted lender who can help you access numerous sources of financing for your investment properties, you get one step closer to financial freedom.  In addition, borrowing funds to acquire real estate helps you leverage your investment and magnify your returns.  Below I’ve addressed some of the most common questions and concerns both novice and experienced investors have asked.  Reach out to me for additional questions or a complimentary analysis of your investment plan.    

 

With a multitude of investment options available today, it can often be confusing on where to start.  The best approach is to diversify and have a long term horizon.  One investment that stands out and has stood the test of time is real estate.    

 

Book an appointment >

Email Me >

By using a trusted lender who can help you access numerous sources of financing for your investment properties, you get one step closer to financial freedom.  In addition, borrowing funds to acquire real estate helps you leverage your investment and magnify your returns.  Below I’ve addressed some of the most common questions and concerns both novice and experienced investors have asked.  Reach out to me for additional questions or a complimentary analysis of your investment plan.    

 

Common Questions asked by Investors:

Should I pay cash for my investment property?

Most times, a primary residence or second home has the goal of providing a place to live or a get away with family and friends. In situations such as these it can feel good to know there are no mortgage payments attached. However, if you are a true real estate investor your ultimate concern is the return you will receive on your investment.
Paying all cash for an investment property poses two problems: 1. Low rate of return on your investment. 2. High opportunity cost.
The more cash you put down on a property, the lesser the return on investment is. If your cash is locked into a property it is not working for you. For example: If you put 25% down on a 4 unit property that costs $1,000,000, you are making a $250,000 investment in your property (1,000,000 x 25%). Let’s say you have $10,000 a month in gross rents (rent collected before taxes and expenses) and you are probably netting about $2,000 per month or $24,000 per year in cash flow. This gives you a return of approximately 9.6% ($24,000/$250,000). If you paid all cash and invested the full $1,000,000 in the property, then there is no mortgage. If your cash flow after taxes, insurance, and expenses is approximately $6,100 per month or $73,200 annually, then your return on investment is only 7.32% ($73,200/$1,000,000). A 2.28% difference on your return on investment. And this difference isn't just the first year, it will be realized each and every year you own the property. The second issue is high opportunity cost. By paying all cash on that one property you are not following the cardinal rule of investing and that is diversification. Instead, you could have bought 4 different properties, spreading your risk. In addition, having 4 properties appreciating versus 1 can help you achieve exponential returns.
For example: If you only bought one property for $1,000,000 all cash and 10 years from now it’s worth $2,000,000 you would have gained $1,000,000 or a 100% return on the equity. However, if you would have bought 4 properties worth $1,000,000 each and then in 10 years they are all worth $2,000,000 each that would be $8,000,000 total value ($2,000,000 x 4) and you would have gained 700% (($8,000,000-$1,000,000)/$1,000,000). That’s the power of leverage and what the right lender can help you maximize. *The above illustration is to demonstrate the use of leverage and is for informational purposes only and is not a true case study. Though many people have achieved similar returns through leverage, or “not putting all your eggs in one basket”, this is not a promise nor guarantee of returns. Your individual results may be different. Investing in any asset involves risk and you should therefore consult legal, tax and financial experts before investing.

Most times, a primary residence or second home has the goal of providing a place to live or a get away with family and friends. In situations such as these it can feel good to know there are no mortgage payments attached. However, if you are a true real estate investor your ultimate concern is the return you will receive on your investment.
Paying all cash for an investment property poses two problems: 1. Low rate of return on your investment. 2. High opportunity cost.
The more cash you put down on a property, the lesser the return on investment is. If your cash is locked into a property it is not working for you. For example: If you put 25% down on a 4 unit property that costs $1,000,000, you are making a $250,000 investment in your property (1,000,000 x 25%). Let’s say you have $10,000 a month in gross rents (rent collected before taxes and expenses) and you are probably netting about $2,000 per month or $24,000 per year in cash flow. This gives you a return of approximately 9.6% ($24,000/$250,000). If you paid all cash and invested the full $1,000,000 in the property, then there is no mortgage. If your cash flow after taxes, insurance, and expenses is approximately $6,100 per month or $73,200 annually, then your return on investment is only 7.32% ($73,200/$1,000,000). A 2.28% difference on your return on investment. And this difference isn't just the first year, it will be realized each and every year you own the property. The second issue is high opportunity cost. By paying all cash on that one property you are not following the cardinal rule of investing and that is diversification. Instead, you could have bought 4 different properties, spreading your risk. In addition, having 4 properties appreciating versus 1 can help you achieve exponential returns.
For example: If you only bought one property for $1,000,000 all cash and 10 years from now it’s worth $2,000,000 you would have gained $1,000,000 or a 100% return on the equity. However, if you would have bought 4 properties worth $1,000,000 each and then in 10 years they are all worth $2,000,000 each that would be $8,000,000 total value ($2,000,000 x 4) and you would have gained 700% (($8,000,000-$1,000,000)/$1,000,000). That’s the power of leverage and what the right lender can help you maximize. *The above illustration is to demonstrate the use of leverage and is for informational purposes only and is not a true case study. Though many people have achieved similar returns through leverage, or “not putting all your eggs in one basket”, this is not a promise nor guarantee of returns. Your individual results may be different. Investing in any asset involves risk and you should therefore consult legal, tax and financial experts before investing.

How much cash do I need to buy an investment property?

The amount of cash you will need to buy an investment property depends on several factors: type of property, loan program, whether you’ll be living in it, and credit score. If you're purchasing 2-4 units and do not plan on living in one, then the minimum is 25% down but the interest rates are lower if you put down 30%. If you own more than 4 units, then you can still buy another property but the interest rates will be higher. If you plan to live there, Fannie Mae will require 20-25% down but FHA (Federal Housing Administration) will allow only 3.5% down. This is the best way to start your real estate portfolio, and the rental income will help you afford the housing payment.

The amount of cash you will need to buy an investment property depends on several factors: type of property, loan program, whether you’ll be living in it, and credit score. If you're purchasing 2-4 units and do not plan on living in one, then the minimum is 25% down but the interest rates are lower if you put down 30%. If you own more than 4 units, then you can still buy another property but the interest rates will be higher. If you plan to live there, Fannie Mae will require 20-25% down but FHA (Federal Housing Administration) will allow only 3.5% down. This is the best way to start your real estate portfolio, and the rental income will help you afford the housing payment.

What kind of down payment is required on an apartment building?

An apartment building, or “multi-family residential building,” has 5 or more units and is subject to commercial financing. The down payment is usually 25%, although there are programs that require only 20%. The amount of down payment depends on how much the building's cash flow can support. As an example, many self-employed individuals write off numerous expenses on their taxes. Hence, their tax returns reflect very little in adjusted gross income which many lenders look at for qualifying purposes. However, if you have prior property management experience, decent credit, very little debt and healthy cash reserves you may still qualify. Therefore, if the building has strong cash flow and is maintained well, you may only have to put down 20%. Some people who are self-employed qualify for 5 or more units better than they qualify for 2 - 4. The reason for this is that many commercial lenders take a more “common sense approach,” whereas they look at your credit history to determine whether or not you are a “slow pay.” They also look at how much debt you have maintained and paid off.

An apartment building, or “multi-family residential building,” has 5 or more units and is subject to commercial financing. The down payment is usually 25%, although there are programs that require only 20%. The amount of down payment depends on how much the building's cash flow can support. As an example, many self-employed individuals write off numerous expenses on their taxes. Hence, their tax returns reflect very little in adjusted gross income which many lenders look at for qualifying purposes. However, if you have prior property management experience, decent credit, very little debt and healthy cash reserves you may still qualify. Therefore, if the building has strong cash flow and is maintained well, you may only have to put down 20%. Some people who are self-employed qualify for 5 or more units better than they qualify for 2 - 4. The reason for this is that many commercial lenders take a more “common sense approach,” whereas they look at your credit history to determine whether or not you are a “slow pay.” They also look at how much debt you have maintained and paid off.

What is the down payment required on an investment property if I'm a Veteran?

The great news is your down payment can be ZERO if you utilize your VA loan benefits. The caveat is you must live in the property for the first 12 months. After this time you are free to rent it out to tenants and begin collecting income. Check out my section on VA loans for more information.

The great news is your down payment can be ZERO if you utilize your VA loan benefits. The caveat is you must live in the property for the first 12 months. After this time you are free to rent it out to tenants and begin collecting income. Check out my section on VA loans for more information.

Can I still purchase investment property if I'm retired?

Yes! Investing in real estate rental property could be the best move for your retirement and could help you achieve retirement sooner rather than later. The rental income may help you afford the housing payment and you can still qualify for a loan. Book a free consultation with me and I can help you do an assessment.

Yes! Investing in real estate rental property could be the best move for your retirement and could help you achieve retirement sooner rather than later. The rental income may help you afford the housing payment and you can still qualify for a loan. Book a free consultation with me and I can help you do an assessment.

Can my parents co-sign for me on an investment property?

Yes! Under FHA underwriting guidelines, parents can co-sign on 1 and 2 unit properties but not on 3 or 4 units. If you are purchasing with a conventional loan (Fannie Mae), and not living, there then you are co-investors (they are not a co-signer in that case) on the property…and that’s ok.

Yes! Under FHA underwriting guidelines, parents can co-sign on 1 and 2 unit properties but not on 3 or 4 units. If you are purchasing with a conventional loan (Fannie Mae), and not living, there then you are co-investors (they are not a co-signer in that case) on the property…and that’s ok.

Which is a better investment: a single house or multi-unit property?

To answer this questions it heavily depends on your short, mid, and long term financial goals. Investing in property units is very much like investing in mutual funds or EFTs, because these types of assets allow you to spread your risk. For example, if you own 10 units and one person moves out, you still have the 9 other rents to cover your overall expenses. Whereas investing in a single family home incurs significantly more risk because if one person moves out you have no other tenants to help cover your expenses. Just like a stock or bond allocation plan, you also need to have a real estate financial plan.

To answer this questions it heavily depends on your short, mid, and long term financial goals. Investing in property units is very much like investing in mutual funds or EFTs, because these types of assets allow you to spread your risk. For example, if you own 10 units and one person moves out, you still have the 9 other rents to cover your overall expenses. Whereas investing in a single family home incurs significantly more risk because if one person moves out you have no other tenants to help cover your expenses. Just like a stock or bond allocation plan, you also need to have a real estate financial plan.

Is a condominium a good investment?

Like any investment, condominiums present opportunity and risk.  Thinking about where you want to invest, whether in a retirement community, a vacation hotspot, in the city, or suburbs is the first step?  Next is finding out how many condos are in the community, whether 10 or 1,000.  Then you should consider the age of the buildings and amenities.  Then you want to inquire as to whether the association is strong and running smoothly or if it is mired in financial difficulties.  In addition, making sure the association has adequate insurance will also be necessary.  You'll also want to inquire what percentage of units have renters and if there is any pending litigation against the association.  Also, are the community's cash reserves sufficient or will dues be raised shortly or a large cash one time assessment be incurred.   And what expenditures do they cover exactly including roads, roofs, pools and such and the condition and age of these.  Finally, will this be a short or long-term purchase.  All of these points should be considered before making an offer or even looking at a specific condo investment. 

Like any investment, condominiums present opportunity and risk.  Thinking about where you want to invest, whether in a retirement community, a vacation hotspot, in the city, or suburbs is the first step?  Next is finding out how many condos are in the community, whether 10 or 1,000.  Then you should consider the age of the buildings and amenities.  Then you want to inquire as to whether the association is strong and running smoothly or if it is mired in financial difficulties.  In addition, making sure the association has adequate insurance will also be necessary.  You'll also want to inquire what percentage of units have renters and if there is any pending litigation against the association.  Also, are the community's cash reserves sufficient or will dues be raised shortly or a large cash one time assessment be incurred.   And what expenditures do they cover exactly including roads, roofs, pools and such and the condition and age of these.  Finally, will this be a short or long-term purchase.  All of these points should be considered before making an offer or even looking at a specific condo investment. 

How do I calculate my Return on Investment (ROI)?

There are several schools of thought on calculating the return on investment for real estate. ROI or return on investment is typically calculated as the annual income divided by the amount of the investment. The investment is usually comprised of the down payment, closing costs on your loan, and any upfront expenditures or repairs to make the property habitable and rentable. Some investors will also include the amount of principal reduction gained through monthly mortgage payments as part of the ROI. Still, other investors will include any tax benefits or depreciation in their ROI, as well as an estimate of price appreciation. Since some of these are not straight line calculations and are market dependent many argue that they should not be included in the calculation. However, if you'd simply like to start off easy, begin with the monthly cash flow and multiply it by twelve months and divide by your initial investment.

There are several schools of thought on calculating the return on investment for real estate. ROI or return on investment is typically calculated as the annual income divided by the amount of the investment. The investment is usually comprised of the down payment, closing costs on your loan, and any upfront expenditures or repairs to make the property habitable and rentable. Some investors will also include the amount of principal reduction gained through monthly mortgage payments as part of the ROI. Still, other investors will include any tax benefits or depreciation in their ROI, as well as an estimate of price appreciation. Since some of these are not straight line calculations and are market dependent many argue that they should not be included in the calculation. However, if you'd simply like to start off easy, begin with the monthly cash flow and multiply it by twelve months and divide by your initial investment.

Is being a Landlord a nightmare?

Most landlords have a smooth experience renting their properties out. However, you do occasionally hear a story about tenants destroying property, not paying rent, and moving out in the middle of the night. Completing your due diligence on the property and neighborhood before you buy is paramount.  Then, establishing a set of parameters for screening tenants is essential.  If you currently have a full time job and many personal obligations it's even more advisable to seek and hire a professional property manager to maintain the property and the tenants.  Select and interview potential property managers to ensure they have a robust system of checks and balances, and a well developed sense of “good” versus “bad” tenants.  The longer you own investment properties and the more interaction you get with tenants, determining which ones are good and bad becomes almost second nature.

Most landlords have a smooth experience renting their properties out. However, you do occasionally hear a story about tenants destroying property, not paying rent, and moving out in the middle of the night. Completing your due diligence on the property and neighborhood before you buy is paramount.  Then, establishing a set of parameters for screening tenants is essential.  If you currently have a full time job and many personal obligations it's even more advisable to seek and hire a professional property manager to maintain the property and the tenants.  Select and interview potential property managers to ensure they have a robust system of checks and balances, and a well developed sense of “good” versus “bad” tenants.  The longer you own investment properties and the more interaction you get with tenants, determining which ones are good and bad becomes almost second nature.

*Investing in any asset class involves risk of loss. Therefore you should always consult a legal, tax and financial consonsultant before investing as individual results may vary.

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