Tighter lending standards now require investors to put down 20% on investment property. This will eat up an investor's cash in a hurry. However, there are a couple of strategies to get around this current dilemma.
One way is to buy investment real estate that needs rehab. In this case, we would aim to buy real estate and rehab it for 70% less than it's after repaired value, or ARV. A few banks and mortgage companies specialize in these investor loans. These loans are referred to as rehab loans, construction loans, or hard money loans. These are unconventional loans that are not backed by Fannie, Freddie, or guaranteed by the FHA. They are typically due in 6 months to a year.
Step 2 - after we complete the rehab, we then refinance the investment property into a conventional fannie mae or freddie mac loan so we can pay off the original rehab loan - which usually come with high interest rates, so we want to get out of those rehab loans as quickly as possible.
So as an example, let's say we buy a home with an after repaired value of $100K. We purchase it for $60K and spend $10K rehabbing the home. Thus, we get a rehab loan for $70K (70% of the after repaired value of $100K). So we've basically bought a home that needs some work for no money out of pocket other than closing costs. Once we refinance into the conventional long-term loan, we'll have to pay more closing costs, but you can see how we could pick up investment homes for $5K-$10K out of pocket - even in this tight lending environment.
Another strategy for those that are a bit flush with cash. Put cash into a bank and have an agreement with the bank that they are going to give you lines of credit for the cash you hold in their bank. Then, instead of using that cash to pay cash for a home - you use the line of credit to buy an investment home. This reduces your closing costs and finance charges, and gives you the same advantages that those that pay cash for homes enjoy - except it's easier to refinance more quickly into a conventional loan.
These are a couple of ways to continue to create wealth even in uncertain times. Remember, great challenges bring great opportunities. So get ready. 2010 is going to be ripe with investment real estate opportunities for those that are ready, willing and able, to take the tiger by the tail!
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