Is income property the right buy now?



 Original Post Date: October 19, 2010

By: Marilyn Kalfus

Q.:  “Is now a good time to buy income property?

A.:  “We get this question a lot about not only income property but about single family residences as well form prospective new homeowners. Everyone has an opinion, for every ‘yes’ there is at least one or more ‘no’ responses to this question.  Without providing a definitive yes or no I will provide some information so you can determine if the market is right for you to dive into, or continue in, the investment real estate market. For this discussion I am assuming ‘investment property’ to be one to four units that you will not occupy.

“The residential income market is soft, softer I feel than the single family market, and the main reason is the difficulty in financing non-owner occupied purchases and units. Combine the two and look to finance a non-owner occupied three or four unit building and the lending gets as restrictive as it gets. Interestingly the investor mortgage market is not that much tighter today than it was pre-meltdown for conventional loans (Fannie Mae/Freddie Mac), unlike the single family market. Many of the guidelines we are using are close to what they were pre-2008.  The most significant change is how rental income is considered in qualifying.

“Because the lending from Fannie and Freddie has always been somewhat restrictive for investor mortgages the relative erosion in market conditions due to foreclosure is considerably less than the single family/condo markets due to foreclosures.  Most of the property declines in the 2-4 unit properties are as a result of overall market conditions, or because landlords have lost properties due to other factors besides being upside down. Since most investment properties have been purchased with 25% or more down and turn a break even or better cash-flow owners are in a better position to ride through the down markets.

“The primary factor limiting financing for investment properties is the use of rents for qualifying. Prior guidelines allowed 75% of the rents on the subject property to be used for qualification purposes. If the fourplex you were considering purchasing had rents of $4,000 per month then $3,000 per month would be added to the application for qualifying. The loosest guidelines for qualifying rental income today are based upon your experience. If you can show a two year history of property management then a few lenders will allow 75% of the rents for qualifying. Without the history you must qualify for the property with no rent credit, and many lenders follow this guideline even if you are an experienced investor. 

“What this means is that if you are a homeowner and are looking to invest in some rental property for the first time you must qualify for the mortgage to purchase the property with both the full PITI (principle, interest, taxes, insurance) for both your current residence and the new property.  If your current housing payment is $2,750 per month including taxes and insurance and you are looking at a $650,000 duplex with 25% down you will have a PITI of approximately $3,400 for qualifying; your income must therefore support total monthly payments of $6,150 per month plus any other debt such as car payments and credit cards. 

“A second factor is cash for downpayment. Depending on the loan amount the minimum requirement is either 25% or 35% down; prior limits would allow 20% down for non-owner occupied purchases through Fannie Mae and Freddie Mac. Given the high value of Southern California real estate, the amount of money needed for a three or four unit building can be as much as some single family homes.

“The investment market is soft primarily due to the increased income and cash needed to qualify for and obtain financing.  Reduced opportunities for financing soften a market; in the case of residential units this is having a far greater impact on values than foreclosures.

“Is now a good time to buy investment property?  If you can qualify and are looking for a long term investment and feel that the market provides you with a good opportunity then perhaps it is; if you feel the market will decline substantially in the next several months then perhaps not. Keep in mind, making investment property even more affordable in this market are the incredibly low interest rates—under 5% for three and four unit buildings with 25% down is pretty incredible.”