Categories
Real Estate

What you need to know about home loans: FHA, VA, and Conventional Loans

For many, owning a home is an exciting dream, and one of the best ways of achieving that is through a mortgage. Taking on a mortgage is necessary if you don’t have the cash to pay the cost of a home upfront. Several real estate investment consulting firms offer incredible benefits, such as investment in property opportunity zones.

In fact, when choosing the best mortgage option, it’s crucial to have clear facts about how much money you’ll need to present, how high your credit score should be, and whether you’ll need extra money to pay for the mortgage insurance.

If you’re considering taking a mortgage but are unsure where to start, let alone which loan to take, keep reading. In this article, we discuss three of the best mortgage options–conventional loan, FHA, and VA loan–their differences and advantages.

FHA Loan

The Federal Housing Administration (FHA) insures an FHA loan. If you have low credit scores, then you should probably apply for the FHA loan. Moreover, FHA loans require a lower down payment compared to conventional loans.

To borrow the value of a home using FHA, arm yourself with a 580 credit score and a 3.5 % down payment.

With an FHA loan, you don’t get the loan directly from the FHA. Instead, the FHA guarantees and insures your loan from approved lenders, banks, or financial institutions. As such, your lender is at a lesser risk because the FHA will pay the claim if you default.

FHA borrowers who get approved must purchase mortgage insurance and make premium payments to the FHA.

FHA Loan requirements for 2021

The FHA-approved lender will gauge your qualifications as it would any mortgage applicant. However, instead of evaluating your credit report, a lender may scrutinize your work history and payment records for the past two or three years.

Additionally, you need a front-end debt ratio (your monthly mortgage payments, mortgage taxes, and insurance) at a maximum of 31% of gross monthly income and a back-end debt ratio (your mortgage payment plus all other monthly debts) at a maximum of 43% of gross monthly income.

However, it’s crucial to note that the lower your credit score and down payment, the higher the interest rate you’ll need to pay on your FHA mortgage.

Advantages

● You don’t need exceptional credit scores.
● Low down payments.
● You can build your equity sooner and stop renting earlier.
● Suffering from bankruptcy or foreclosures does not hinder your ability to get an FHA mortgage.

Disadvantages

● Since you have a poor credit score, one requirement is paying mortgage insurance upfront and annually to protect the lender from default risks.
● You’ll have to meet stringent property requirements.
● You will pay higher interest rates to compensate for the low down payment.

Conventional Loans

Like any other ordinary loan, the government does not back or insure this mortgage loan. Instead, private lenders guarantee it, while the borrower pays the insurance. Conventional loans are available through various mortgage lenders, such as banks, credit unions, and online lenders.

There are two types of conventional loans–fixed and adjustable-rate loans. A fixed-rate conventional loan charges constant interest, while an adjustable-rate conventional loan changes interest rates according to market conditions.

Conventional loans are riskier because the government does not back them. Therefore, it can be harder to meet the requirements than FHA or VA loans.

Conventional Loan qualifications

Build up your credit score to 620 and have at least a 3% down payment to be eligible for a traditional mortgage loan.

The private lenders will verify your documentation, including recent payment records, bank statements, tax returns, and other financial information. They want to ensure you have a solid income that can meet monthly mortgage payment obligations on time.

Next, the lender will evaluate your debt-to-income (DTI) ratio (other debts you need to pay each month, including loans and credit card debt). The DTI ratio should not exceed 43%, although some might exempt a ratio of up to 50%.

Advantages

● You can cancel the mortgage insurance once you reach 20% equity in the home.
● They offer flexible repayment terms.
● The conventional loan rate is lower than FHA loans.
● Conventional loans are flexible and offer options for second homes and other similar real estate investment opportunities. This means the borrower does not have to occupy the property.

Disadvantages

● They do not allow projection-based financing
● Require a lot of collateral
● They feature restrictive agreements.

VA Loans

A Veterans Affairs (VA) loan is a mortgage loan established and backed by the U.S. Department of Veterans Affairs. They are available to service members, veterans, or those who were discharged.

Private lenders, such as mortgage institutions and banks, provide these loans. However, if the borrower defaults, the VA offers a settlement.

Who qualifies for a VA loan?

You must complete 181 days of active service during peacetime and at least 90 consecutive days of active service during wartime. Alternatively, you must be the spouse of a service member who lost their lives in the line of duty or who has a service-connected disability.

Advantages

● No down payment
● Lowest interest rates
● No mortgage insurance
● You can finance the total value of the home

Disadvantages

● Mandatory funding fee
● Strict appraisal and inspection

Which is better?

To find the best option between FHA vs. Conventional vs. VA loans, you need to consider your preferences, needs, finances, and qualifications.

While the VA is exceptional as there are no down payments necessary, only war veterans or their spouses qualify. You don’t need exceptional credit history to get an FHA loan, but that also means high-interest rate payments and mandatory insurance payments.

On the other hand, a conventional loan offers flexible repayment terms, and you can opt-out of insurance payments once you get to 20% equity. Choosing one over the other will depend on your financial situation.

Apart from that, one can avail several benefits through diversifying their portfolio. For example, you can save money on taxes by following the 1031 exchange process and making wise investment decisions.

Categories
Real Estate

Section 8 Multifamily Ownership to Build Wealth

The Section 8 Housing Program offers financial assistance to access low-cost housing, sometimes referred to as the housing choice voucher program. And is one of the most reliable real estate investment opportunities known so far.

Since the government takes care of a large chunk of rent payment, the section 8 multifamily subsidized housing program has a massive advantage over traditional rental contracts. We examine how a shrewd property owner can tap into the program and build wealth.

According to the latest figures, about 2.2 million households by low-income earners receive subsidized rent through the section 8 housing choice voucher program.

What is the Section 8 Program?

Under the program, the government pays a percentage of the tenant’s rent directly to section 8 landlords whose property is in the listing. The U.S. Department of Housing and Urban Development Management (HUD) funds the program by paying, on average, 70% of a section 8 tenant’s rent and utility bills. A family must typically earn under 50% of the median income in a given area to qualify for HUD Section 8 relief.

Section 8 Multifamily Home Ownership

Homeownership and maintenance under the program can involve financial support from the HUD. The owners can also access conditional government subsidies when renovating, building new homes, or putting up properties for a mortgage.

The homeowner must set aside units to house the low-income American population under the section 8 housing list.

Section 8 landlord application can be lengthy and costly, involving a lot of paperwork, a waiting period, and property inspection. It can take up to 5 months to get approval.

Multifamily homes are properties with up top units and still qualify as a single residence from lending standards. These can be townhouses, duplexes, triplexes, or apartments with up to four units. Five units and above are multifamily but usually require a commercial mortgage.

Most multifamily dwelling property owners rent them out to residents. They are great for generating a higher monthly rental income with lower maintenance costs, so you can rely on commercial property investment to build wealth over time.

Vouchers under the Section 8 Housing Program

Section 8 includes two types of vouchers for the tenants– The Housing Choice Voucher Program and the Project-Based Voucher. The Housing Choice Voucher program allows tenants to choose any unit within the section 8 program. The Project-Based Voucher ensures that the federal rental assistance stays within the selected housing unit and is often more profitable for the owner.

Advantages of Section 8 Multifamily Home Ownership

1. Easy Bank Financing

For real estate investors with a record of handling rental assets, the bank can use the projected rental income from the units to finance down payment programs for multifamily homeownership.

2. Certainty of Rental Income

Upon qualifying for the Section 8 program, the HUD agrees with the property owner on the expected rental income, per the Fair Market Rate. The landlord will receive monthly payments from the government, even when there’s a recession.

3. Occasionally Higher Rental Rates

As an incentive, the government often includes an annual 5 to 8% incremental increase on rent payments. The rate could translate to a better deal than what they would get from the open market.

4. Increased Occupancy Rate

Qualified and listed property multifamily homeowners get access to a vast pool of would-be tenants on the waiting list. The list can have 2 million or more Americans at any given time. That means minimal vacancy issues, reducing your marketing budget significantly.

5. Stability of Rental Income

The federal subsidies make multifamily homes in the Section 8 program suitable for long-term tenancy, as the tenants are likely to stay longer in the units.

Source: Morning Invest(Youtube Channel)

Building Wealth through section 8 Multifamily Home Ownership

Among several real estate investment opportunities one can look for investing in several multifamily homes as a remarkable way to achieve long-term cumulative wealth. Here are some tips to consider when investing in section 8 multifamily homeownership:

a) Choose and manage tenants wisely

While renting out the multifamily units under Section 8, you pay off your mortgage from the tenants’ rent. Hence, liabilities go down, while in almost every instance, the property’s value goes up.

In this case, there comes a time when the mortgage is zero, and the income is primarily profit. Therefore, you can obtain more multifamily property, which you can scale to millions of dollars in wealth.

b) Ready Investors

The multifamily concept is more investor-friendly as compared to single-family units. In this case, when you need financing, you bring the deal to the table while investors bring the money on board. Later, the profits get split as agreed.

c) House ‘hacking’

When you own a multifamily home, you can live in one of the units while renting out the rest. The tenants’ rent caters to your housing expenses, and you can save up over time.

d) Add more rooms

A sure-fire way to increase your rental income is to follow the BRRRR (buy, renovate, rent, refinance, repeat) strategy. Additionally, it would be best if you thought about increasing the number of rooms.

There’s a healthy market for multifamily homes with more than four bedrooms, but a chronic shortage for them:

For example, a single home will make you $150 in profit per month, but a duplex will rake in $300, while four-unit multifamily will fetch $600 within the same timeframe.

Bottom Line

Scaling up wealth from multifamily units has a longer time horizon, is not entirely problem-free but is assured, especially when listed in the Section 8 program, whereby there is the assurance of monthly government payments. It gets better over time as you can hire property managers from top commercial real estate investment companies that also offer a few tax benefits like 1031 exchange process to run it on your behalf, and you can adjust rental prices upwards after periodic renovations.

Categories
Real Estate

Top 10 Things to Watch in Commercial Real Estate in 2022

Top 10 Things to Watch in Commercial Real Estate in 2022

Thanks to increasing demand and a recovering economy, the real estate market is on an upward trend for 2022. There is a rise in activity in all the asset classes, with the leaders being industrial and multifamily.

In 2022, this upward trend will continue as investors and tenants alike demand more real estate variety. The mortgage interest rates forecast for 2022 is 3.6%, which could impact the market. That said, this is what to expect from commercial real estate investing in 2022.

1. Brick-and-Mortar Retail Stores

The pandemic brought about a surge in online shopping, while sales in traditional brick-and-mortar stores declined due to social-distancing requirements. However, there has been a rise in the share of eCommerce retail sales from 16% to 19% in 2020 compared to pre-pandemic 2019.

Brick and mortar stores vs E-Commerce year to growth rates

Even though online shopping offers advantages like convenience and saving on time, many consumers still prefer shopping in person. Brick-and-motor shops allow consumers to shop for items that require accurate sizing and a proper fit.

More online business owners will likely push the demand for brick-and-mortar properties. For instance, Amazon recently announced its first-ever physical store for men’s and women’s fashion, Amazon Style. The store is set to offer an elevated shopping experience and will open later in the year.

2. Return-to-office

Even though offices remain the hub for business activities, employees now have flexible work-from-home options. Employees can skip the daily work commute for a few days a week. During the height of the pandemic, millions of employees worked from home.

However, as things slowly return to normal, statistics show that an increasing number of employees prefer the more flexible work-from-home model.

Real estate investors must keep an eye out for days when all the employees are in the office for teamwork, which creates a need for bigger office space. That maybe calls for a rethink of the workspace design, as buildings have to conform to the new reality of preventing communicable diseases.

3. Senior Living

With increased life expectancy, there is a growing demand for senior living homes and skilled nurses. The demand is not just about buildings as investments, but the increasing need for places where the elderly can feel safe, protected, and cared for.

It’s expected life expectancy will rise to 85.6 by 2060. Baby boomers are growing old and will need skilled nursing and more senior living homes.

Covid-19 caused a decline in the move-ins, leading to a drop in occupancy rates. Even though there is a growing demand for senior homes now, percentages are still lower than what they were pre-pandemic.

4. Housing Markets

Post-pandemic, consumers are looking for affordable rents and home prices, which in turn will limit home price appreciation and rent growth. Millennials aged 26 to 35 are in the prime first-time homebuyer age and need affordable housing despite the slight increase in mortgage rates to 2.9%. Rising rents, as high as 7.1%, will further drive millennials to purchase homes.

The markets for home purchases and apartment rentals are usually polar opposites of each other. When the rental market is strong, the housing market is soft, and vice versa. The pandemic created a desire for more space, as more people adopted a work-from-home model. This directly affects the rental and housing market, driving them to record highs.

5. The Federal Reserve and Interest Rates

Inflation is expected to continue above the trend and will likely decrease as the year progresses. The majority of the Federal Reserve members predict three interest rate hikes in 2022. They also expect that the increased interest rates will help fight inflation.

Long-term real estate interests will remain low, providing attractive financing conditions for investors. The consumer price index rose to an all-time high in 30 years. However, this does not account for the unpredictable swings during the pandemic’s short period.

The bottlenecks in the supply chain are still present and will continue to be for some time. The shortages in key commodities and goods are likely to continue and fuel high prices in the middle of the year. However, things are likely to cool down towards the end of the year.

Fed Expects Rate Hike for 2022

6. Self-storage

Self-storage outperformed expectations during the pandemic with an average profit margin of 41%, higher than other real estate niches. The increased strength in the apartment and housing markets positively affects self-storage.

Due to the pandemic, more and more people needed to move stuff out to create space for study and work-at-home situations. Further, millennials are starting families, meaning an increasing number of people will look into self-storage. The same goes for college graduates living in cities where living space is at a premium. Thus, before getting into real estate one might want to get complete understanding of several tax benefits like 1031 exchange process to further save money on the profits and investments.

7. Conventions and Business Travels

During the height of the pandemic, business-related travel halted, with most meetings and conventions moving online. Hotels, entertainment, and restaurants catering to business meetings can expect a recovery in 2022.

Selling a new product or closing a major deal is always best done in a face-to-face meeting, thus increasing the need for hotels, meeting spaces, and entertainment spots.

8. A Rise in Mixed-use Developments

An overarching trend is the migration of urban user to decongested areas, leaving vast office spaces unused. To utilize the available urban spaces and provide better value, commercial real estate investors will likely turn to mixed-use developments.

That way, commercial developers can stem the tide towards residential properties by having all amenities, such as retail, commercial, and residential properties all under one roof. Mixed-use developments sound the best way to attract a new market.

9. Digital Real Estate

Digital communications surged during the pandemic since people relied on them for work, e-commerce, and entertainment. Even as the economy opens, people continue to rely on digital communications because of the conveniences they offer.

This leads to a demand for cell towers, data centers, and logistics facilities, which counts as growth in commercial real estate.

10. Smaller is Better

What the market has reaffirmed is that nothing stays static forever, so there is some wisdom in moving with the times. Currently, companies are hesitant to commit to long-term leases, hence the shift towards shorter-term leases.

Further, as employees seem to prefer the hybrid working model, it makes sense to opt for small working areas, or even smaller ones situated closer to workers’ residential areas. So investors are likely to target smaller suburban offices.

Final Word

While interest rates are set to rise during the year, it doesn’t create much of a worry for commercial real estate players as they expect a commensurate rise in the economy. Also, a few top commercial real estate management companies smoothen the process for investors to get through the hustles involved. That said, some of the trends you should expect from the commercial real estate market include a rise in hospitality spaces, workspaces, and brick-and-mortar retail spaces.

Categories
Real Estate

Top 10 Tips on Minimizing Risk Before and After Purchasing Multifamily Property

Like any other investment, multifamily properties pose some risks for their investors. It’s not as risky as investing in the stock market, but considering the amounts involved, a multifamily investment can easily eat into your finances if it goes bust.

So, how do you minimize risk to commercial real estate investment? This article highlights the best 10 tactics you can employ to mitigate the risks of purchasing and maintaining a multifamily unit.

1. Assessing the Competitive Set

That involves assessing the risks associated with the submarket or the property’s geographical location. In real estate, a competitive set refers to the group of properties that compete with your property for business.

An investor uses the competition to benchmark a property’s performance before purchasing. Carry out an analysis of properties comparable to what you’re interested in investing in.
Using this information, you can identify factors like occupancy rates to determine whether the property is profitable or not. Alternatively, consult property owners and managers within a competitive set to gain valuable information.

2. In-person Property Tour

Now that things look good on paper, it is time to take a closer look at the property. Plan to view the property in person and ensure your tour includes the units, common areas, and amenities.
For common areas like hallways and the lobby, consider the cleanliness and general condition.

As for the amenities, look at their layout within the property. Is it organized? Consider the advantages or disadvantages, if any, of the design of the amenities within the multifamily property.

As you inspect the units, look at them from a renter’s perspective. If you rent out the units within the property, what is lacking, or what needs improving?
Consider factors like how spacious the units are, the cabinets’ finishing, and whether it has a balcony or outdoor deck. These ‘extra’ touches are what would make a renter choose your property over another one.

3. Know Your Residents

After inspecting the property’s physical aspects, it’s time to scrutinize who lives there. Please pay attention to how they use the property and its amenities. This inspection will give you an overall feel of the general resident profile.

Additionally, an in-depth analysis will provide an income profile for your residents. You can also get detailed information on the residents, such as their employment background.

Later, after purchasing the property, you should conduct criminal background checks on current and future tenants. This will prevent any scuffles or illegal activity on or near the property.

Law enforcement will hold you responsible for renting to a criminal, even unknowingly.

4. In-person Tour of Competitive Properties

The next step is to inspect the properties in your competitive set. Go through the same process of reviewing common areas, amenities, and units. Managers or property owners will grant access to the property. Be honest about why you’re there.

Let them know that you want to tour the premises and any available units. Consider the same attributes you did with the property you wish to purchase, then compare the differences. Look at what other properties have that yours does not. On the other hand, look at what is missing to capitalize on.

5. Conducting Inspections and Determining Capital Costs

Even if you are a seasoned investor who understands the ins and outs of properties, it is still necessary to call in the experts when analyzing a multifamily property. Third-party professionals need to conduct a thorough assessment of the property.

These experts will consider factors that you may not even think about, such as the building’s age, the condition of the roof, drainage issues, and the quality and conditions of mechanical components.

Using the analysis from these specialists, you’ll be able to determine capital costs needed soon or over an extended period. You will also need to factor in repair costs that are a part of capital costs.

6. ‘North, South, East, West Analysis’

Go back to your prospective property and conduct a North, South, East, West multifamily analysis. It is a process that involves placing yourself in a tenant’s shoes. Look at the property from their perspective.

Walk-in from all directions. If possible, drive in from all directions too. Doing this will give you a feel of what it is like to live on the property. As a resident, what do you find most appealing about the property? What don’t you like?

Is the distance from the store convenient? Is it a generally safe neighbourhood? Looking at the property from a resident’s perspective offers you the opportunity to have an objective look at its weaknesses.

7. Building a Budget

This is one of the most important aspects of commercial real estate investment criteria. If you are new to investing, you may place all of your focus on the operating expenses. Instead, you want to develop a budget that factors everything about the building from scratch.

The budget can include factors like the staff. Ensure you look at service contracts to understand what services they provide.

Additionally, create your version of an operating budget based on gathered information, and compare it to the actual running budget the property currently has in place. The budget will help you determine what the net property income is.

8. Opportunities for Revenue Growth

Looking at the net property income, you can determine whether there are opportunities for growth with the same revenue. You can compare rents and determine whether the rate is fair or there’s headroom to raise the rent.

Also, the local market determines the rates you apply and whether there is potential for a new supply of properties in the area.

9. Evaluating Supply Threats

At this point, you should already have a clear picture of your competitors. In addition to looking at existing units, you need to scrutinize any multifamily properties coming up in your submarket. This is because these new units may end up competing with yours.

More multifamily properties will affect the amount of revenue your property brings in. If you’re in a larger market, you won’t feel the impact, but the effect is more prominent in a smaller submarket. This might prove to be a hectic task to monitor so you would need the help of the best commercial real estate investment company to assist you throughout the process and bring the best deals to boost capital gains.

10. Market Stability versus Volatility

Look out for a stabilizing factor for your property. For example, perhaps the property is located near a university. Students need housing, and it is unlikely that a university would relocate out of the blue.

Another stabilizing factor is whether a city is a state capital or not. Such factors help indicate how stable or volatile a market is over the long run.

Final words

Have all of these factors in mind as you consider investing in a multifamily property. Be diligent with each step to ensure your property remains profitable even in the face of recessions. Also, make sure to avail all the tax benefits you are eligible for such as the 1031 Exchange Process. That is the best way to minimize risk while saving more when making a multifamily purchase or a sale.