As people evaluate real estate as an alternative investment strategy, there are today, more ways to creatively purchase investment homes than ever before. One of these strategies has been popular with customers at our company and certainly many others. We call this the “Limited Investment” strategy. Limited investment typically means someone is investing less than they would on a normal investment home purchase transaction. Normal is your typical 20% down real estate deal where you finance the property with improvements already done to the property. Usually in addition to the 20% down one pays typical mortgage closing costs.
The normal strategy typically gives you a higher net cash flow from the property because more money is being placed in the deal. It doesn’t however, give you the biggest discounts possible because someone has already taken the risk out of the property for you. Leaving you with the most turn-key possible investment home. This is a strategy some of our clients employ when purchasing from Investor Nation. Typically the buyer does not want to hassle with the improvements on an investment home. These properties usually offer the seller, in this case Investor Nation, a higher profit margin. The seller buys the home, physically does the renovation, and usually places a tenant for the investor. In the normal transaction the property needs to appraise only for the purchase price, leaving appraisal risk mitigated somewhat.
The limited investment strategy offers the home to an investor for a deep discount. This is usually because the home is being offered in a pre-improvement format. The investor takes out a short-term, usually high cost, construction loan to buy and improve the property. The investor then refinances the short-term loan with a traditional refinance via a network lending partner. This 2 loan process is done to avoid putting down the traditional 20% + closing costs. Unfortunately this deal carries a risk in 2009, that did not exist in 2008; appraisal risk. This whole deal depends on an appraisal coming in via a 3rd party appraiser who’s name is drawn out of a hat by the permanent lender’s AMC (Appraisal Management Company). Thus if an appraisal falls short, the buyer of the property is often forced to bring additional funds to the table. Usually this still is a less money out of pocket deal for the investor thus providing a higher rate of return on their cash invested.
These pitfalls are next to impossible to avoid with the new appraisal regulations passed this year. This prevents banks from talking to the appraiser or telling them what is value is going to be needed to make the deal work. Keep in mind again that this is a good alternative but can get more expensive than initially planned.
The bottom line. If you are considering real estate as an alternative form of investment, please consider all the factors and be prepared to invest cash into your deals. Remember expecting an ROI (Return on Investment), usually works best when you have an “I” (Investment).
