We’ve all heard that you make money when you buy, and this is true.  You can also make a good deal an even better deal if you put some creativity into your financing strategy.  There is a very simple recipe to follow when buying any non-commercial property (4 units or less).  I recently deviated from my multi-unit buying to pick up some homes in appreciating markets.  I was new to single family home investing and quickly learned that there are tricks involved, and oddly enough, realtors don’t seem to know about them and most mortgage brokers don’t either.  So I thought it would be worthwhile to pass along what I’ve learned.  Here’s the recipe:

Ingredients:

  • Property with 4 or less units, bought at 5% or more under market/appraisal value, or with a gain in appreciation during your build-out time if doing preconstruction
  • 5% down payment money
  • Good credit ~680+
  • Good mortgage broker
  • Good appraiser
  • Good property management (www.landlordsystem.com will help you determine what’s good)

Directions:

  1. Find a good rental property and pay at least 5% under market value (it must appraise for at least 5% more than what you pay, or you must be in an appreciating market). 
  2. Close on your property by putting 5% down. It’s not real important what loan program you get into here, just make sure you don’t have any prepayment penalties.
  3. Immediately refinance into a pay option ARM loan using the equity you have in the property.  The loan you get depends on how much equity you have and what your credit score is.  Your appraisal may answer this for you as well. 
  4. Enjoy an investment property with substantially lower payments than you originally had, while only having your low 5% out of pocket into the deal!

There’s a lot of detail to fill in yet, such as: What is a pay option ARM? Why not get one right away? How do I avoid paying closing costs twice, on the original buy and then on the refi? Can you really refi so soon after you buy? How important is the appraisal and where does it need to come in at for this to work?

I’m going to go through this discussion in bits over the next few days.  For now, know that in order for this strategy to work, all you need is to find a property that is 5% under market. We have buyer’s markets in places all over the country right now and this is not hard to find!  Plus, think of preconstruction situations.  When you have a build-out time of anywhere from 6-12+ months, all you need is a market that will appreciate 5% during that time, if you are buying right at market value when you sign the contract.  This is very doable!

Start leaving your comments. Hopefully we can scare up a nice discussion that will answer a lot of the questions that are out there.  More tomorrow…