by Nancy Osborne, COO of ERATE®
May 16, 2008 - It may seem counter-intuitive to think of buying property in a market where news of rising foreclosures and declining home prices appears almost daily but for the serious investor looking to get into the market, perhaps for the first time, the current climate in real estate may offer one of the best buying opportunities in years. Ironically those areas with the highest rates of foreclosure could offer the best real estate deals. While it may seem that waiting for the market to hit bottom is the best approach, the flip side of waiting is the risk or opportunity cost of interest rates (30 year mortgage rates) climbing and potentially offsetting any further decline in prices. For investors planning to hold on to a property for a minimum five year period, it might be best to proceed sooner rather than later. Qualifying for an investment property loan is certainly not an easy process in today's lending climate as a return to traditional underwriting standards is the norm and borrowers must now have excellent credit, verifiable income, the required down payment as well as sufficient cash reserves at closing.
However there may be no better time in recent years to get off the fence and buy a rental property while the market has been in free-fall mode. With the amount of depreciation which has already occurred in some markets, for many new investors looking for the opportunity to get in, the timing could be perfect. First, it is important to locate an area which has experienced significant depreciation and then careful consideration should be given to ensure that in a backdrop of declining prices the demand for rental units has remained strong in that area. The goal would be to walk in with or to achieve a positive cash flow situation as quickly as possible, balancing rental income with expenses. Multifamily properties containing two or more units may offer the best opportunity for achieving positive cash flow from the outset, however many areas which have experienced a high level of price weakness may at least offer the opportunity to break even.
Acquiring a lender owned property, also referred to as an REO (Real Estate Owned), is an option worth serious consideration. Lenders carrying a high number of properties on their books should be very motivated to negotiate a sale. However where a tenant occupied rental unit is involved, a lender will likely be inclined to force an eviction first, regardless of whether the tenant was in good standing making payments on the monthly rent, in order to help facilitate a sale. REOs can be in serious disrepair as the vacating homeowner or tenant may have let the property go as they realized they were on their way out. Aside from facing some deferred maintenance, it is also worth noting that investors may be taking on an element of greater financial risk when acquiring a rental property in that other assets may be placed at risk should you default on an investment property mortgage as the rules may differ from that of owner-occupied (versus non-owner occupied) financing as it relates to having other assets on the hook.
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Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.