Investing in Real Estate

Why Invest in Real Estate?

Real estate investment is becoming more and more popular, and not just for property developers.  An increasing number of regular homeowners are purchasing second homes to flip or rental properties.  But why are these people “jumping on the bandwagon”, so to speak?

The Attraction

First of all, investing in real estate provides an attractive return on investment (or ROI).  To start, investors can generally use only a small amount of their own capital as a down payment, and receive the remaining amount of money required to purchase a property as a mortgage (for example, 20% down payment and 80% financing from a mortgage).  This is known as the “principle of leverage”.  Then, because real estate appreciates at an average of 5% per year (and has for the past 25 years), the investor can recuperate their investment, plus any profit made after repaying the mortgage.

Another option to make money off of real estate is to purchase a rental property.  Investors are still able to use a relatively small amount of capital to start (although more capital could be required because of the nature of rental properties), and then are able to charge rent for tenants to live in/at the property.  Any rent that is above and beyond the mortgage payment and cost of maintenance is profit.

Real estate investment is also beneficial for those who have a hard time saving money, as it can act as a sort of forced savings account.  Essentially, as you pay down the principal of a mortgage, you're reducing debt and building equity.  Then, when you go to sell the property, the money you receive back from the sale is considered your “savings”.

Many people want to enter the domain of real estate investing because, although it is possible to lose money in real estate, the risk is fairly low.  As mentioned previously, real estate appreciates at an average of 5% per year, and has for the past 25 years, so the chances of someone losing money on a purchase is pretty slim.  However, keep in mind that this number is just an average, and one must also take into consideration certain factors when choosing a property, such as desirability of location and stability of the market.

Finally, one more attraction of venturing into real estate investing is the fact that it really only requires part of your time, is flexible, and the skills can be learned.  The process is relatively easy, and is therefore easy to pick up on.  It does, however, require motivation, drive, a positive attitude and the desire to pick up key principles, strategies and techniques.

Financing Options

There are many rental financing options available for those wishing to get into real estate investment.  Below is a table showing the basic features of the rental mortgage products available from four of First Foundation’s mortgage lenders.  Please keep in mind that these lenders are not all the lenders that First Foundation deals with, nor are these mortgage options exhaustive.

 

 

Lenders

     
  First National MCAP Merix Macquarie
Maximum Loan-to-value 80% for purchases
90% for refinances
80% for purchases
90% for refinances
80% for purchases
90% for refinances
80% for purchases
90% for refinances
Maximum Amortization 35 years 35 years 35 years 35 years
Minimum Beacon Score 650, or 680 if you want higher loan-to-value    640 for conventional purchases
660 for high-ratio purchases
680 for high-ratio refinances
660 for purchases
680 for refinances
660 for purchases and refinances
680 for condo purchases
700 for condo refinances
Maximum # of Units 4 properties 4 properties 4 properties 4 properties
Rental Offset 50% on subject property and other rental properties 50% on subject property and other rental properties 50% on subject property and other rental properties N/A
Down payment Must be from the borrower’s own sources, not borrowed or gifted Can be gifted or from borrower’s own sources, but not borrowed Must be from borrower’s own sources, not borrowed or gifted Must be from borrower’s own sources, not borrowed or gifted
Other Features Portability, flexibilities for energy-efficient housing Portable, assumable and transferable. Can be used in conjunction with FlexStar, a line of credit mortgage Down payment can be gifted for interest-only products Flexible payments, assumable and portable. Good for strong clients
 


Loan-to-value amounts for rental properties must be below 80%, thus requiring a 20% down payment. Please read our blog New Mortgage Rules Start Today to learn more about the new mortgage rules.

A Beacon score is your credit score.  Please read our article Understanding Credit Reports to learn more about Beacon scores and credit reports.

The rental offset is the amount of rental income from the property(ies) that the lender is willing to use as qualifying income for the mortgage.

An option for rental property financing is the interest-only mortgage.  Although fewer lenders offer this option, interest-only mortgages allow the property owner to pay monthly payments of only interest on the principal amount.  This is good for property owners because the rental building will generally appreciate - so they’ll still obtain a profit when the property is sold - and they will have greater monthly cash flows from renters (rather than paying down a mortgage with the rent they charge).  This allows the investors to possibly invest in other properties, as it allows them to build capital they can use for down payments on other properties.  Also, interest paid on borrowed money for investments (in this case an investment property) is tax deductible, so you can obtain a bit of a tax break from the interest you pay on your investment property mortgage.  The more interest you pay, the bigger the tax break is.

How do I get started?

You can get started in real estate investing by visiting First Foundation and discussing financing options available for your specific situation.  From there, First Foundation can obtain mortgage pre-approvals for you so you can start looking for investment properties!

I want professional investment advice!

You've come to the right place.  First Foundation Financial Services can help you choose the right investment products to suit your needs and grow your wealth.   
 

If you're interested in entering the wonderful world of real estate investment, or learning more about anything that was mentioned in this article, please contact First Foundation today!

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Last updated Apr 10, 2014