By Harold Copher, Jr. ,Willow Bend Mortgage

Residential rental property can be an attractive investment. Unlike stocks, or other financial investments, almost everyone has experienced the role of tenant and/or homeowner. Being familiar with both roles may make an investment in residential rental property less intimidating than other types of investments.

Naturally, life as a homeowner or a tenant isn’t all that is required to become a successful real estate investor. Selecting the right property, the best loan terms and the right tenants goes a long way toward determining our success or failure.  

In my experience, investors in real estate set objectives based on one of two categories: Leveraging their investment dollars to take advantage of appreciation or borrowing with the intent to own real estate for cash flow.  Investing for appreciation does not mean we will not have cash flow, just like investing in real estate to target cash flow doesn’t mean we won’t see appreciation with the investment. If history repeats itself, and we are in it for the long haul, we are likely to realize both appreciation and cash flow.

There are two characteristics of the property we are considering that are worth noting: the property use and the property type. The property’s use or intended purpose will fall into one of three categories: Primary residence, second home or an investment property. Property type can differentiate between single family attached or detached, duplexes, three to four unit properties, condominiums, or manufactured homes, etc. For lending purposes, residential real estate refers to a single structure with one to four units. If there are five or more residential units in one building, that’s considered commercial multi-family housing.  

Lenders assign a higher risk (of default) to the same property being purchased as an investment property or rental unit, compared to the same property being used for a primary residence. That risk manifests itself into a larger minimum down payment and higher interest rates. Most of us understand how and why that risk translates into the loan terms offered. 

Lenders also assign a higher risk based on property type. If you wanted to purchase a multiple unit property, a manufactured home, or certain condominium properties, you should expect to see a larger minimum down payment requirement and/or a slightly higher interest rate due to property type.  

For the most part, mortgage programs have been developed and risk parameters refined based on loan performance over time. Put simply, more restrictive loan terms are the result of using historical data to better assess risk parameters that incorporate property use and property type. Doesn’t that also mean we have a better chance of being successful as real estate investors if we analyze our transaction using the same mindset?  

When meeting with clients, I try to point out lending parameters they may view as constraints should be used to help measure whether their plans are sound. If you’re a first-time home buyer, and your targeted price range nets you a monthly house payment around 25 percent of your gross household income, shouldn’t you derive a measure of comfort knowing that data collected from mortgage loans over time support your likely success in adjusting your budget from renter to homeowner with that monthly mortgage payment? 

If we are interested in investing in real estate and are in a position to occupy one of the units in a two to four unit property as our primary residence, the terms are somewhat favorable for an investment property purchase. As a primary residence transaction, we could acquire the property with a minimum 20 percent down payment, instead of the minimum 25 percent down payment required for this property type as an investment property. In addition, the interest rate is likely better than purchasing the same property as a non-owner occupied investment property with a minimum 25 percent down payment. 

If we’re serious about becoming a real estate investor, and trust the mortgage industry builds in risk factors based on loan performance over time; then does acquiring a multiple unit property as an onsite resident give us a better chance for success than other property types? Is that success due to more favorable loan terms? Yes, but it may also be due to having more than one revenue stream and being onsite as property manager. It could be that’s the less obvious message mortgage lenders are sending.  RL

About Harold Copher, Jr.
A mortgage and loan professional for more than 20 years,  Harold has a BBA degree in Finance and is a TREC certified instructor


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