Tough time to buy an investment property

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mrsrobinson

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Mar 9, 2006
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The Mrs and I have been thinking about buying another rental property. The tenants in one of our current ones have procrastinated signing the renewal lease. So we sent them a non-renewal letter and ran an ad in the local paper.

We raised the rent just to see what the market was like. Saturday and Sunday combined, we received 10+ calls! In the meantime the tenants signed the lease. There are 3 homes just like this one for sale on the same street so I thought, heck, lets buy another one and rent it out to one of these 10 callers.

I spoke with a lender yesterday morning before the bail me out of jail thing failed. He quoted us 6.5%, 10% down, can close in 10 days. Great I thought, lets get a good price and do it. I come in this morning to this email:

"Well to say the least the market had an interesting day, my apologies for the late email. I have enclosed 2 good faith estimates showing the difference between 10% down which is minimum for investment property and 20% down. Going through the loan programs and pricing out the rates for an investment property has taken on some new challenges with the current market that we see today. Per our conversation today we were looking at rates around the 6.5% to 6.75% for investment properties, however that is not the case anymore they have jumped to 7.5% with 10% down and down to 7.25% with 20% down. Lenders have repriced and have really took it up a notch regarding investment properties."

Rates jumped almost a full 1%. So, because of this mess we are now "priced out" of doing this. Plus, when we purchased our last rental property we put down a 5% deposit even though we did not have to.

Not complaining, not trying to make a point, just a FYI.


 
I'm shocked that 1% in the 6.5 - 7.5 range priced you out.
 
Hampton said:
I'm shocked that 1% in the 6.5 - 7.5 range priced you out.
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Ditto! Sounds like there is a good demand for the rental. What was your cap rate? If you are in the 10% plus range sounds good to me. I hope you are dealing with a local realtor. Real Estate is all local. It sound like you are talking long term rental not vacation/weekend type rental. As long as the job market / local economy is holding people are going to need a place to live
 
This is short to long term, not a vacation home. My thought process is buy at the low, sell medium to high in 5-10 years. We looked at purchasing a vacation/rental property in Kiawah, SC for a while but decided not to in the end.

Yes, we are working with local folks, same ones that have sold us 3 homes.

The combination of the 1% increase in rates and a higher deposit has priced us out for now. I am not comfortable giving up 10-20% cash right now.

It's a great time to rent, just a bad time to buy a rental property.
 
mrsrobinson said:
The Mrs and I have been thinking about buying another rental property. The tenants in one of our current ones have procrastinated signing the renewal lease. So we sent them a non-renewal letter and ran an ad in the local paper.

We raised the rent just to see what the market was like. Saturday and Sunday combined, we received 10+ calls! In the meantime the tenants signed the lease. There are 3 homes just like this one for sale on the same street so I thought, heck, lets buy another one and rent it out to one of these 10 callers.

I spoke with a lender yesterday morning before the bail me out of jail thing failed. He quoted us 6.5%, 10% down, can close in 10 days. Great I thought, lets get a good price and do it. I come in this morning to this email:

"Well to say the least the market had an interesting day, my apologies for the late email. I have enclosed 2 good faith estimates showing the difference between 10% down which is minimum for investment property and 20% down. Going through the loan programs and pricing out the rates for an investment property has taken on some new challenges with the current market that we see today. Per our conversation today we were looking at rates around the 6.5% to 6.75% for investment properties, however that is not the case anymore they have jumped to 7.5% with 10% down and down to 7.25% with 20% down. Lenders have repriced and have really took it up a notch regarding investment properties."

Rates jumped almost a full 1%. So, because of this mess we are now "priced out" of doing this. Plus, when we purchased our last rental property we put down a 5% deposit even though we did not have to.

Not complaining, not trying to make a point, just a FYI.


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Perfect example of what the issue means to people on "main street" as it has been coined. You will not be buying carpet, appliances, cabinets and so on. Couple this with declining IRA and investment values and house values drop at an even more accelerated rate as the money available for down payments is reduced. Top line values fall.

A friend who is a large farmer just had his credit line tightened and can't get the money for fertilizer. Follow that one through to the crops next season.

The current mess is much more than a Wall Street creation and issue. The scope been very poorly communicated. There needs to be and will be a huge amount of pain.

I'm not that confident the HR bill that didn't pass yesterday would remedy the problem but it turned into a shameful political exercise. Pelosi's diatribe was appalling and Bush couldn't muster the forces for a bake sale at this point. Yuck.
 
I was surprised at you only being quoted 6.5 to begin with for an investment property. and not having to put anything down on your first property...wow.. In our area (and a couple of years ago ) that was the best rate I could get with 20% down.

And yes while it is an example of main street today and who it will hurt.. it's also sounds like part of the reason banks are in trouble.

Cash is king once again
 
Larry&Leisa said:
I was surprised at you only being quoted 6.5 to begin with for an investment property. and not having to put anything down on your first property...wow.. In our area (and a couple of years ago ) that was the best rate I could get with 20% down.

And yes while it is an example of main street today and who it will hurt.. it's also sounds like part of the reason banks are in trouble.

Cash is king once again
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We purchased the property I referenced 4 years ago. If I recall we had the option to do 100% financing but chose not to.
 
Greg, I think you are onto a reasonable investment idea, if you can get the financing squared away. If foreclosures go up, those former "homeowners" have to live somewhere. Assuming they don't move back in with their parents, they'll have to rent somewhere.

Are all the banks in your area this anal? In our area, some of the local community banks are still lending at decent rates and terms on good risks. Banking, like real estate demand, can vary widely from one market to another.
 
I'm sure every area is different. But, in NJ 20% for down paymant on investment property was the case for a while.
 
mrsrobinson said:
Rates jumped almost a full 1%. So, because of this mess we are now "priced out" of doing this. Plus, when we purchased our last rental property we put down a 5% deposit even though we did not have to.
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If everyone had this control, we wouldnt be in this mess. Kudos.
 
I just purchased a flipper and got 6.325%, but I paid $175k for the home while getting two "honest" (non-inflated) written appraisals "as is"; one for $261k and the other for $265k. You can still invest and get decent rates if you shop well.

Which is how it should have been all along.
 
GJarrett said:
I just purchased a flipper and got 6.325%, but I paid $175k for the home while getting two "honest" (non-inflated) written appraisals "as is"; one for $261k and the other for $265k. You can still invest and get decent rates if you shop well.

Which is how it should have been all along.
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Now try selling it. How much did you invest on the 175?

There are 3 flips I know of that the carrying costs are going to turn into practically "break evens" (whereas the profit after investment is 10% or less) in 6 months, 7 and 9 months from now. All 3 have been on the market for appx 6 months already or so.
 
we have found the same thing with interest rates. However the price of the homes has dropped so low that the increase in the rate does not reduce the income from rental or profit in a flip that we are able to continue buying rentals and resales. We have been able to rent our homes prior to completeing the renovations. I hope the sales go that way too!
 
billandamy said:
Now try selling it. How much did you invest on the 175?

There are 3 flips I know of that the carrying costs are going to turn into practically "break evens" (whereas the profit after investment is 10% or less) in 6 months, 7 and 9 months from now. All 3 have been on the market for appx 6 months already or so.
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I've already got a contract and due to close on Oct 22nd. I put 5% down, but got it back at closing for construction loan, so my out of pocket is going to end up just being simply the holding costs for the month.

Granted, if the deal falls through, holding costs will hurt, but there's enough equity in the property to make money unless I end up with it for a long time.
 
GJarrett said:
I've already got a contract and due to close on Oct 22nd. I put 5% down, but got it back at closing for construction loan, so my out of pocket is going to end up just being simply the holding costs for the month.

Granted, if the deal falls through, holding costs will hurt, but there's enough equity in the property to make money unless I end up with it for a long time.
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"I put 5% down, but got it back at closing for construction loan,"

??
 
GJarrett said:
I've already got a contract and due to close on Oct 22nd. I put 5% down, but got it back at closing for construction loan, so my out of pocket is going to end up just being simply the holding costs for the month.

Granted, if the deal falls through, holding costs will hurt, but there's enough equity in the property to make money unless I end up with it for a long time.
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Cool, Im hoping for a close for you. So you didnt put anything into the house...invest in new kitchen or anything? Just a buy/sell?
 
Yep, I've never been able to do that before; I've always had to put some work in before reselling. Sometimes a lot of work. However this home had so much equity in it and so little work needed that a local builder has decided to take it and do it. I'm selling it to him cheap (79% of as-is value) and I could probably sell it for more, but for me it's worth it not having to mess with working on it or worrying about getting stuck with it for several months. I could keep it, paint/carpet it, do minor repairs, and then market it on the MLS... but it could take months to sell, and I'd lose the 6% real estate agent fee, and I'd spend another 10% fixing it up, and etc.... by the time all that happened I might not make much more than I will now just quick-flipping it.

mrsrobinson said:
"I put 5% down, but got it back at closing for construction loan,"

??
Click to expand...
Greg, I had to make a 5% down payment and earnest money deposit on the home to qualify for the loan, so that came out of my pocket. However, I got the home so cheap that the mortgage amount approved for it more than covered the entire cost of the house, so once I bought it, I was able to ask for it back as a "construction loan" to start fixing it up... so I got all of my money back. In the meantime, I got this offer on it so I don't have to use any of that money to start fixing it up. If I really do close the sale on the 22nd *fingers crossed* this house will be the best flip I've ever done by far (I've done a dozen or so over the past three years).
 
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