We have all heard about the cash investors that have been in the news so much over the last few years. Based on those news reports it sounds like the only way a person can become a real estate investor is if they are fortunate enough to have piles of cash. The good news is, that isn’t true. You don’t have to pay all cash for a rental property. It is possible to buy a single family investment property with less than 30% cash to close, including repairs.
Down payment: There are a few variables that can affect the amount a lender will require for down payment. Credit score and type of property being purchased have the biggest impact on down payment. Typically a borrower who has a middle credit score of 680 or better will be able to qualify for what is called a conforming loan. “Conforming” refers to Fannie Mae and Freddie Mac lending guidelines. A borrower who qualifies for a conforming mortgage can expect a minimum down payment for a single family investment property at 20 percent of the purchase price. Investors will need a down payment of 25 percent for properties with two to four dwelling units.
Closing costs: Typically, in Bend, Oregon you can expect that closing costs will be three percent of the purchase price or less. That isn’t always true but more often than not it is. A good loan officer and title company rep should be able to give you an estimate that is right on the money as long as the closing date doesn’t change.
Cash reserves: At the time of closing the lender will require the borrower to have cash reserves equal to six months of mortgage payments. For purposes of calculating cash reserves the monthly payment is considered to include principal, interest, taxes and insurance. Once the purchase has closed the borrower is not required to maintain those reserves but would be wise to do so.
Interest rate: Plan on the difference in rates between a mortgage for an owner occupied home and a rental home being half of one percent.
Repairs: Most real estate investors are not looking for a move-in ready property but one they can buy at a discount. That discount usually comes with some needed repairs. Those repairs can be anything from paint and carpet to a new roof and a furnace. Each investor has their own threshold for how many and what kind of repairs they are willing to undertake. It is important for an investor to know what those repairs will be and budget for them as early in the process of buying a property as possible.
Here is an example of how to figure out how much cash a person buying their first investment property might need:
- Purchase price of single family home – $125,000
- 20% down payment – $25,000
- Buyer’s closing costs @ 3% of purchase price – $3750
- Repairs – $3000
- Property taxes – $1500/year or $125/month
- Homeowners insurance – $450/year or $37.50/month
- Principal and interest @ 5.25% – $552.20
- Principal, interest, taxes and insurance – $714.70
Total cash needed: $36,038.20 = Down payment $25,000 + Closing costs $3750 + Six months PITI ($714.70 x 6) + Repairs $3000