Although, historically, owning investment real estate, is considered, a quality, relatively – safe, vehicle, it takes some knowledge, understanding, planning, and carefully, choosing the right/ appropriate property, to do so! After, more than 15 years, as a Real Estate Licensed Salesperson, in the State of New York, and, someone, who has, on several occasions, invested in residential rental properties, I strongly, believe, it is important, and meaningful, for potential investors, to pay keen attention, to these 6 basic principles, about the realities, etc, of doing so, With that in mind, this article will attempt to, briefly, consider, examine, review, and discuss, these.
1. Down – payment, usually higher: When one purchases a multi – family house, unless he lives there, lenders consider it differently, from the perspective of how much, down – payment, is required, if using a mortgage, as a part of the purchase. While, rules, and conditions, often,differ, the normal conventional mortgage, for a single – family house, is 20%, but, for a non – owner – occupied one, it is 25%.
2. Additional requirement/ predicted income/ revenue/ cash flow: Lenders, usually, when offering mortgages, for a single – family, house, base their decisions, on, the appraised value, and a set of numbers, ratios, etc, believed to represent a borrower’s ability to afford to repay, etc. However, with multi – family scenarios, a key requirement, is based on the predicted revenues, from rents, anticipated income, and cash flow. This is done, to minimize the lender’s risks!
3. All the costs: Know all the costs of owning and operating the specific property, from the onset. These considerations should consider: owner’s responsibilities for real estate taxes, utilities, maintenance, repairs, revenues, cleaning between tenants, maintaining common areas and/ or, grounds, etc. All of these expenses, should be factored into one’s decision to purchase a specific property!
4. 6% rule: A smart, rule – of – thumb, I call, the 6% rule. This means the revenues (stated, conservatively), minus all costs of ownership (paid monthly or averaged, that way), is the Cash Flow. This means, unless/ until, the true, Cash Flow, is at least, 6% positive!
5. The 75% occupancy guidance: When, calculating, anticipated revenues, take into consideration, vacancies will happen, and be prepared. Thus, after determining the revenues, using market – rates – rents, reduce the number, to 75%, to account for this, contingency!
6. Ease/ demand of renting: Consider the specific, real estate/ rental – housing market, and if, it is difficult, or challenging, to rent, when there are vacancies. Research, how long, on average, similar units, take to rent, in this geographic area!
Position yourself, to make the wisest real estate decisions, by considering, at least, these 6 relevant factors, prior to investing in a specific property! Will you proceed, with the discipline, to be a wiser buyer/ investor?