Z2: Case Studies
November 24th, 2009 • Related • Filed Under
Vashon and Riley want to re-enter the housing market as investors. (They currently own their own single family homes.) They have attended several investment seminars put on by local real estate agents and have decided to begin buying homes at the foreclosure auctions or buying REOs from the banks. They both have $50,000. to invest for a combined total of $100,000 capital. What type of mortgage loan would you recommend for these two investors? We can assume they will qualify with decent credit scores and DTI ratios.
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Comment by Teresa Gallaher on 4 December 2009:
If their scores and incomes qualify them, then they should do a conventional fixed rate loan. They want to look to keep their purchase price below the jumbo range in order to get the best rate and terms.
Comment by Ken Ritter on 11 December 2009:
If they are not looking to “flip” the homes I would recommend a traditional 30 yr loan. If they are however looking to flip the homes I would recommend an arm without a prepay.
Comment by richard martin on 11 December 2009:
Both appear to be in a good position to start their investment business and are not looking at commercial properties so I would think with their solid financial status they would be looking at a conventional fixed loan unless they are planning for short term,in that case then some kind of an arm.
Comment by Jan Mundt (Henriksen) on 20 December 2009:
How do we define “investment” property? Are they buying properties to rehab then resell or buy to rent out? If the LTV works as a rental, I would recommend a 30 yr fixed if the property cash flows and meets investor guidelines. If their intent is to rehab and resell the property, I would broker to an investor that has an investment-rehab program.
Comment by Launce Macomber on 21 December 2009:
The case study begs for more details. Intent of ownership will dictate the best path. Assuming they will want to invest in potentially rentable properties, over the long term, the conventional fixed rate loan will be the safe bet assuming it meets reasonable cash flows. If they are looking to flip and make a quick buck as the market returns, an arm would probably make the most sense.
Comment by Jerrod Goode on 29 December 2009:
I would have to argee that more info would be needed to help point them in the right direction. A 30yr fixed product would probably work just fine for them, but it truly depends on their goals.
Comment by Jason Brock on 30 December 2009:
I believe it is completely dependent on what their long term goals are… flip, rent, and keep. These are the questions that must be asked prior to writing a loan for them and looking into their best interests. If their goal is to develop a portfolio of rentals perhaps they should look into splitting up the investment pool to many homes…
Comment by James Haechler on 30 December 2009:
Depending on what there goals are would determine the type of loan. As long as income and credit scores are good a conventional 30 year loan would be where I would go. Wouldn’t put them in an adjustable loan. If they couldn’t flip the house or rent it they would be at the mercy of the adjustable.
Comment by Arash Fiuzi on 30 December 2009:
I would recommend that they stick to REOs and short sales and to keep the purchase price under $400,000 to keep the LTV below 75%. If they can find a trustee sale for $100,000 I would adivse them to buy that cash and rehab it with a cash out loan once they have achieved seasoning.
Comment by Arash Fiuzi on 30 December 2009:
The other advice I could give them is to convert their prinipal residences to rentals if they could achieve positive cash flow on their departing residence. In essence, I would put three options inf ront of them and let them pursue the ones they feel most comfortable with.
Comment by Kelly Fiscus on 30 December 2009:
A conventional loan is best if they are planning to keep the property long term. An arm is great IF the investment property is for short term.
Comment by Chris Yanke on 30 December 2009:
If they are buying with intent of owning several properties and selling them over the course of SEVERAL years but having them be rentals, the Conventional 30 year Fixed rate program would provide a good value as long as they put 30% down. Investment properties have a large hit in fees and rates and the more cash you put into a transaction the benefit you’ll have of maximizing your rental income. However, some banks still offer 3 and 5 year investor ARM loans so if Vashon (who picked that name???) and Riley had shorter term goals of selling within those time frames then I’d review that scenario as well. I agree with Kelly.
Comment by Kelly Fiscus on 30 December 2009:
I say 30 year fixed rate if you are keeping the properties as long term investments. Yes you have to have a big down payment but it lowers the LTV and helps with the CASH FLOW.
If you are thinking short term do an arm.
Comment by Harold Burton on 31 December 2009:
I would suggest that they look at REO’s. Multi family properties in foreclosure. Duplex, samll apartment building with 5 to six units. Purchase price not exceed $400,000.00 and call it a day.
Another suggestion would be to covert there primary to adult care depending on the local zoning. If there primary residence becomes rental say for 12 month’s they would be able to qualify for a larger investment property.
The current interst rates are so low I would suggest a 30 year fixed and possibily look closely at the advantages of a 2/1 buydown. This would certainly help with future cash flow.
Comment by Karen Tuff on 31 December 2009:
If they are holding the property to rent, then a 30 year fixed loan, an arm if they want the investment short-term. I would keep the price point low and there is a lot of out-of-work talented contractors that can be hired to do fixers.
Comment by Kimberly Peterson on 31 December 2009:
a 30 year conventional fixed loan for them should work.
Comment by Daniel Mulvehill on 26 February 2010:
For Vashon and Riley; offer them a FHA Non owner loan program, no pre-payment penalty they can finance tthe homes with the resent FHA change on Flips being acceptable under the seasoning law change and with that much potential capital available to buy in the mid to low range price bracket to enhace the likley hodd of buying more properties.Keep the loans within the conforming limits to avoid a sudden change in the non-conforming arena and keep steady on what is working withn the present economics of 2010?
Comment by Elisa Wu on 28 February 2010:
They could do it since they have downpayment, and as long as they inverst a property under 400k, it would be fine.
Comment by Bryce Zimmerman on 22 May 2010:
About the only option with would be 80% conventional financing, plus typically this amount is needed to cash-flow, while also avoiding MI. Depending upon if these are a flip or a long term investment would dictate weather it should be an 5/1 I-O or a 30yr FRM
Comment by Angie Williams on 27 May 2010:
I would start by asking what their investment goals and objectives are for this house. How long will they have the home. What is the average rent in the area. From their I would calculate their cash flow and provide them the information to make an informed decision.