By Cathy Salustri
With houses, condos and apartment buildings selling for a fraction of what they did a few years back, now just might be the time to invest. But how can a potential investor take advantage of the current real estate market without plunking down a lot of cash?
While buyers won’t find a bank to finance 100% on any property, purchases can still be made with relatively little cash down. Here are the 4 main ways to accomplish it.
1. Use Home Equity
Natalie O’Connor, a St. Petersburg, Florida mortgage broker, encourages cash-poor buyers to tap their primary residence’s equity for a down payment. O’Connor says many banks will still lend up to 90% of a home’s equity on a no-cost line of credit either at or below the prime rate.
2. Let the Seller Finance the Deal
“You have sellers that just need to get out of houses,” O’Connor says. “You’re seeing a lot of private financing going on (like) lease purchasing, owner financing or private mortgages.” It can be a good way for some investors who wants to purchase property but just haven’t saved up the 20% for a down payment.
Buyers who choose non-traditional mortgages may be well served to seek the representation of an independent third party or attorney to remove any question of legalities. If buyers take those precautions there’s no reason that creative financing can’t be as good as obtaining a mortgage through a bank—sometimes even under better terms.
3. Put 20% Down
“As long as you have 20% down and good credit, and you can document your income you can still get a loan,” says Rachel Sartain, who has bought and sold many investment properties. Sartain reminds buyers that 20% down isn’t that different than 10% down was a few years back.
Suppose a home sold for $300,000 four years ago but now is available for $150,000. Four years ago a buyer could have financed 90% of that home and put $30,000 down, but today’s buyer can put down 20% of today’s $150,000 asking price for the same $30,000 and get a lower interest rate.
4. Buy a Rented Property
Another option for buyers is to purchase a home or condo that is already rented. A rented home shows lenders the property can generate income and the owner can make their payment. As a result, some banks may accept a smaller down payment.
However, when banks use rental income to qualify a buyer, they typically only count 75% of the monthly rent. They do this to account for maintenance and periodic vacancies. The growing foreclosure market has placed so many homes on the market for sale that in many areas it’s easy to have positive cash flow on an investment property.
Every buyer should be able to take one of these four options to capitalize on investment properties in a down market. With so many options and an abundance of inventory on the market it just might be the time to invest.