When investing in real estate, it is highly desired to achieve positive cash flow on a month-to-month basis. This is true even if you are relying on property value appreciation to supply the bulk of your desired return on investment. If you are losing money month-to-month, you may find all of your eventual income eaten up by the monthly drain on your income. This will be particularly real if there is a downturn in house values for a few years.
Worse yet, you may wheel of the monthly outflow of money, and you may give up on the property before you possess a chance to achieve the desired appreciation. You will end up much more comfortable waiting for your property to appreciate if you are making at least some money every month, or at least not losing money every month.
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One exception to this rule is when you are purchasing a property to fix it up and switch it. While you are fixing it up, you might not be able to rent it out at all (depending on how extensive the work is) or else you may have to rent it at reduced rates. The negative cash flow is just area of the expense of rehabilitating the property and you will be quickly reversed by your profits upon sale of the property. This assumes that you have properly calculated all of your costs and you have purchased the right property.
In other cases, we think it is wise to achieve positive cash flow, Here are some tricks and concepts involving the financing of the property:
Cheaper properties are generally easier to rent at a profit than higher cost properties. It therefore makes sense to purchase two or three smaller homes than one larger one, if your intention is to rent all of them out.
If you don’t already own your own home, consider living in the first “investment” house you purchase. (This assumes it is convenient to live in the area where you want to make investments. ) Interest rates and down obligations are lower for a primary residence. Also, you don’t have to deal with the problems of actually finding and managing tenants, paying for any kind of damage they may cause, and ingesting the cost of an occasional vacancy. This will also give you very valuable experience in working with real estate.
If you live in a home for only two out of five yrs, it probably qualifies as a principal residence from the point of view of the IRS, and therefore appreciation of the property worth is probably tax free up to a certain level (for federal income tax). Check with your tax advisor for your exact rules. So one strategy is to purchase a new investment home every couple of years, live in it for the first couple of years, then purchase plus move into another property. Rent out the first while it continues to appreciate. Since you live in each new house for the 1st few years, you can get a loan at main residence rates, and you will also have the particular tax benefits of a primary residence, however actually own several homes at the same time.
The “second home” (that is, a vacation home) also qualifies for preferential interest rates. You have to be able to state that you live there a portion of each year so you cannot claim rental of the home as income. There are other requirements like location of the property. If this fits, consider making one of your investment properties a second home. Do check with your lender to be sure you know all the requirements for a home to be considered a second home before you go out and buy one. Note that with a second home, you are unable to use any rents your cost as income. You will have to qualify for the loan based upon your income without considering any kind of rental income from the second house.
The easiest and best way to achieve good cash flow is to get a loan using a ridiculously low interest rate for the first several years. Nowadays, a number of lenders offer “payment option” loans. These financial loans offer an optional minimum transaction that starts with a rate in between 1% and 2%, which results in very low monthly payments. As a general rule, these reduced rates last for about 5 many years. During this period, the minimum payment improves year-to-year by a very small amount, usually no more than a factor of 1. 075 each year. If you take advantage of the minimum payment, you are actually charged a normal variable interest rate (such as about four. 5% today), but the interest you are not paying is deferred. At the end of the first five years, the interest you have not really paid is added to the mortgage amount, increasing the loan quantity by a relatively small amount. Ask your own loan officer to calculate the actual amount. At that time, the loan then becomes a standard variable rate mortgage. This is not a problem because you can assume that property value appreciation will be much larger than the deferred interest. With this particular plan, you should plan to refinance or even sell the property within 5 many years, which is commonly not a problem. (Such financial loans may not be available in all states. )
Another way to minimize monthly interest payments is to obtain an interest-only mortgage. The interest-only period of most financial loans is usually 5 to 10 years. You should plan on selling or refinancing by the end of this period.
The interest rate a person pay and your eligibility for specific loans such as a “payment option” mortgage is subject to your credit rating, your work status and the financial reserves (savings) you have on hand. Do everything you can to get your credit scores above average (above 640 and preferably above 680). Make sure you are steadily employed in one job or engaged in your own business or even profession for a period of at least one year steadily, and preferably two, and make sure you can prove it. Extended gaps in employment can make qualifying for the low interest loan much more difficult. Lastly, save up enough to make at least the 10% down payment. This will open the door to better rates.
Payment option financial loans as described above generally require 20% to 25% down payments. A down payment of 20% or even more will also eliminate the need to pay for mortgage insurance. Mortgage insurance is charged by all lenders for financial loans with less than 20% down payment, even when it is not explicitly stated as such. The additional expense may be built into the rate (as is the case with so-called “sub-prime” or high risk loans), rather than mentioned separately, but it is there. Mortgage insurance plan covers the lender against the risk of a default, when there is not enough extra value in the property to pay off the loan and the expenses of foreclosure.
The above tips and ideas may get a person started toward positive cash flow in your real estate investments. There are many other ideas that may apply to your particular circumstances or where you live or where you want to make investments, and not all of the above ideas may apply to you. We are writing in the U. S. Outside of the U. S., laws and loan programs may be completely different than the above. In any case, please ask your loan officer or even financial advisor for his or her opinion plus ideas to verify and add to the over.