Investing in Real Estate? Steer clear of speculation, focus on cash flow.

This week I had the privilege of attending a ‘Lunch and Learn’ put on by one of our team’s partner lenders, The Dorman Team at Evergreen Home Loans.  I took down lots of notes and learned so much that I immediately had to share with the rest of my team and also emailed some notes to a few clients that I know are either already investing in real estate or are considering investing.  So, I figured I’d share a tidbit here as well because I think the information is very simple but also very useful.

So the Lunch and Learn was covering the topic of “How to Qualify for Multiple Investment Properties”.  Mike Dorman lead the class and instructed us based off of his personal experience.  He’s purchased a lot of investment homes since his early twenties and made a lot of mistakes along the way. His first intro speech was about focusing on current cash flow only, not speculation of being able to buy and sell and make a profit. If you are planning to flip and sell, you must be very strategic and know your numbers if planning on doing that. Also, hire a great inspector and Real Estate Agent.

There are many things to take into account when looking to buy an investment property and accounting for cash flow.

To begin with, Mike said that you absolutely should NOT even consider buying an investment property unless you have $50,000 in the bank. This is a good starting point of financial security in knowing you are in a good place to begin investing.  You can purchase with less than 50K, just put enough down so you are making at least $200 per unit a month in cash to cover expenses. If you have a 4-plex, you should shoot for $300-$600 depending on the age of the property. You don’t want to be strapped to where you cannot take care of the home. The more down-payment you can apply, the better your cash flow will be because your monthly payments will be lower, obviously. Mike gave some examples in a spreadsheet of a $250,000 home with a $50,000 down payment vs. a $100,000 down payment. The home with $50,000 down had a cash-flow of $66/ month after all expenses and the home with $100,000 down had a cash flow of over $300/month.

He said that a conservative estimate on vacancy and what the underwriters use is to assume you will always have 25% vacancy. You should never assume less than 10% vacancy.

On average, account for one month’s rent to be used towards maintenance of the home annually and consider deducting this into your rent amount itself.

You really should hire a property manager. The money spent on a property management company will pay for itself both in the rental amount charged and your time spent managing it otherwise.  Property managers will help you get higher rent amounts similar to an agent selling your home vs. selling on your own.   They do a much better job of screening tenants. Mike gave an example of two brand-new homes in Orting that prior to hiring a property manager, he had to replace carpet and re-paint three times costing him 7K each time a tenant moved out, and this was because of his poor choice of tenants.  Since hiring a property manager, that hasn’t been a problem. For a good property manager, expect to pay 10% of your rental amount.  He mentioned that you shouldn’t try to find the cheapest property manager because you get way you pay for; he wants his property management company to be successful so that they can also do a good job at property management. (Good lesson for anything we hire out!)

He said, do NOT buy ‘nice big homes’, because every time a tenant moves out, the expectation is to clean the place up to be a ‘nice big home’ again, which is costly. Buy simple family homes, 3 or 4 bedrooms with 2 bathrooms. Do NOT buy homes with Septic tanks because of the costly maintenance and issues that can arise with septic tanks.

Mike also supplied us with some breakdowns of the differences in requirements with Freddie Mac vs. Fannie Mae for investment properties, what the down payment requirements would look like, and more.  I would suggest that if you are interested in investing at this time, reach out to Mike and his team and he can help you look at your options.

Hope this was helpful, it certainly was for me!





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