Remember, you’re driving the bus & I’m next to you as your navigator! My job as your agent is to provide you with the various routes that you can take but you’re the driver making the decisions that are best for you! Ideally you've been reading my posts, watching my videos (& others) and taking the time to learn the home buying steps so that when you're ready to submit an offer, you're able to make a decision that you feel confident about!
When multiple offers are expected on a property one of the tools that we can use is an Escalation Clause. This is a document that is submitted along with the offer package. It states your starting offer but gives you an opportunity to increase your offer, by a set amount (increments), up to a maximum amount (cap).
Here's an example:
List price is $279k and comparable properties lead us to believe that offers could go as high as 10% above the list price. You'll want to use your mortgage calculator or get help from your lender to make sure that you understand the difference between the total monthly mortgage payment at different amounts. What is the monthly payment at $285k vs $305k? This will help you to decide if you're ABLE to offer $305k. You'll also want to look at comparable prices in the neighborhood--keeping in mind what it might appraise for, what the future value & equity potential is, and how close on a scale between 1 & 10 does it land on your scale (you can't use 7---that's the indecisive number, it's either 8+ or 6-). This is how you will decide how much you're WILLING to offer.
Here's what the escalation looks like:
List price is $279k; we're willing to increase our offer amount by $xxxx ($1k, $3k, $5k, $10k) over the highest offer up to $x amount.
Starting offer $279k
Increments of $3k
If the highest offer is $300k then your offer becomes $303k. However, if another buyer is willing to pay $309k then your offer is maxxed out at your cap of $308k. If the highest price is the determining factor then the Seller will go with the buyer that pays $309k.
WHY WOULD WE WANT TO SUBMIT AN ESCALATION?
Because we are in a very strong sellers market where most houses, in good condition, will have at least 3 or more offers (my listing at 15 Coes St North Providence had 12 offers!).
Here are some strong reasons to consider an escalation clause with your offer:
1) When there are multiple offers the sellers agent will call for "Highest & Best Offers"--you get one shot & we don't have access to see what the other offers are. You hear about "Bidding Wars" but that's not really how it works.--there isn't usually back and forth.
2) The Escalation Clause is a written document that you will sign. Part of this clause states that the Sellers agent must provide written proof of the "Bona fide offer" that kicks in your escalation. This is so that we don't just have to take the agents word for it that your escalation has been kicked in. So if the highest competing offer, per the example above, is $299k then your offer becomes $302k and they are supposed to provide us with proof of that offer---info will be redacted for the privacy of the competing buyer but again, this is an attempt at transparency.
3) It's a drag to miss out on a house that your really like by a few thousand dollars so this allows you to cover your bases. Have I had people submit escalation clauses who haven't had to go to their maximum amount? YES!! Many times!
Do we have to put in a cap/max amount: No. But I have had this strategy backfire before on a client. We hadn't signed a contract so they weren't in a position where they had to move forward--another buyer put in an escalation that went way over what we anticipated! I've also had it work as a strategy. We have to talk about all of the options to make sure we're using the strategy that works best for you!
Should you start with the list price: yes but I do recommend that you set your increments at $2k or more (meaning that you would be $2k higher than the other most competitive buyer). Why higher increments? It depends on the house & the price point but you may be able to entice a seller to choose you over a similar buyer who perhaps has another more favorable contingency--maybe they've waived the inspection but you're willing to pay $5k more than that buyer so they may be willing to move forward with you even though you have included an inspection contingency.
What else should do you need to know when submitting an offer? I have a video that cover this here. Watch it but here's also an overview:
To make an offer I need to know:
escalation & if so starting offer & maximum/cap & increments
will you include the inspection contingency
will you include the mortgage contingency
will you include the appraisal contingency & if so are you able/willing to offer an appraisal gap
See also: What Are Contingencies blog post
Now that you've read through this let me know if you have any questions! It's a lot to take in but it's my hope that if you have the opportunity to read posts & watch videos you'll be bette equipped to know what else I can do to ensure you understand your options & the process. I'm always here to help!
What is an Appraisal?
One of the contingencies in a real estate purchase contract when the buyer is securing a mortgage, is that the property must appraise for the purchase price. A home appraisal is a report provided by a licensed professional required by the lender to ensure that the purchase price is the fair market value of the property you’re buying.
Appraisal reports usually run around $500-800 for a single-family house and a little bit more for a multifamily property--the report is paid for & belongs to the Buyer. The lender will order the appraisal, using an independent third-party professional who has no interest in whether or not the transaction goes through.
How an Appraisal WorksThe appraiser will visit the property and walk through the inside and outside, taking measurements, photos, and notes--the appraiser needs access to every room. It won’t take long, about 15 minutes. After the on-site review, the appraiser will look at comparable properties (aka “comps”) & write a professional report indicating the appraised value of the property.
Some of the key factors an appraiser looks for include:
Whether you’re buying, selling, or refinancing, a home appraisal that comes in too low could put the entire transaction in jeopardy.
What happens if the appraisal is lower than the purchase price?
The possibility of a low appraisal is why home purchase contracts are often written with an appraisal contingency. Should the home fail to appraise for its contracted purchase price, the contingency clause allows buyers to re-evaluate &, potentially, walk away without losing the deposit. FHA loans require this contingency in any purchases financed with FHA mortgages.
As a home buyer, it’s risky to waive your appraisal contingency as you may be on the hook to make up the shortfall or forfeit your deposit if you walk away. You need to talk to your Realtor & your mortgage lender to make sure that you fully understand your options.
Here’s an example:
A buyer that plans to put 20% down on a house may have the option to increase the loan amount in order to make up an appraisal shortfall. Instead of 80% LTV (loan to value), you could opt to put 10% down instead---this may have other implications such as PMI or a different interest rate so again, it’s important that you talk to your lender BEFORE you jump into the home buying process & talk through these options so that you can make the best possible offer in a competitive market.
Options for a low appraisal
When a home appraises for less than its purchase price, there are a few potential options:
How to rebut or appeal your appraisal
The home buyer, or seller in some cases, can request an appraisal rebuttal or challenge. This is a formal process in which the buyer’s lender submits a request for the appraiser to re-examine the appraised price of the home. Your Realtor can submit additional comparable homes to try & get the appraiser to reconsider the value.
There are a few things to keep in mind:
First, the Lender will have to submit the proposed comps to the underwriter & if the underwriter does not think that they are relevant comps they will decline the request to refute the appraisal. Second, it is crucial to note that the comparable homes MUST be very similar---similar style, condition, location, etc. You can’t compare a Cape to a Contemporary for example, or a 1200 square foot home to one that is 2400 square feet, or one that has recent updates with one that is not. Third, even if you make it past the Underwriter, these rebuttals often have little or no effect on the appraisers report except to take up time & prolong the stress for all parties. The appraiser will submit a rebuttal response, stating that value has been changed based on new evidence, or that it wasn’t changed and why. It's not impossible & if the appraised value comes in significantly low it's certainly worth the effort but you should know that the chances are very slim that the appraisal will reconsider their original report.
The good news for sellers is that many buyers in today’s market seem to have the cash available to either waive the appraisal contingency or offer to pay a specified amount that they’re willing to cover in the event that there’s a shortfall. This is an important strategy that your Realtor should work to negotiate when determining which offer is the most competitive. Likewise, for a buyer, if you have the funds available, offering a specific amount of funds that you can offer in the event of an appraisal shortfall may be the deciding factor between you & another offer in a multiple offer situation.
For the most part there are two main loan options: Conventional or FHA.
Conventional loans: There are conventional loan options for single family properties with down payments as low as 3% or 5% depending upon what you qualify for. In the past, a conventional loan was typically 20% but there are now a lot more options available to buyers which makes home buying a much more viable option for a lot of people! Conventional loans require higher credit scores & lower debt to income ratios. Most lenders can get a conventional loan closed within 30 days following a signed Purchase & Sales Agreement (contract to purchase a home). Note that if you're buying a multi family property, a conventional loan will require 20-25% down payment.
FHA (Federal Housing Authority): these are government backed loans with a minimum down payment of 3.5% for single family or multi family properties (up to 4 units) that will be owner occupied (key phrase--you must plan to live in the house as your primary residence for at least one year).
FHA loans are available to anyone--not just first time buyers-- and are easier for people to qualify for because they allow for lower credit scores and higher debt to income ratios. That's the plus side. The downside is that you have to pay PMI (Private Mortgage Insurance) for the life of the loan. That cost is wrapped into the loan but important to understand. That said, it is deductible on your taxes & PMI is relatively low. The amount of PMI you pay will be dictated by your credit score.
Note that FHA loans won't work for every property---FHA approved appraisers will inspect the property as required by your lender & they'll flag things such as peeling paint, asbestos wrapped pipes, old wiring like Knob & Tube, & a few other issues that I'll be able to identify as we check out properties. If the seller won't remediate those issues then you won't be able to get the loan. Are there ways around this? Yes. Case by case & I'll be able to help you identify what properties just won't work & which ones will (yes, there is a renovation loan called a 203k but that's too much info for this post!). There aren't many condos that qualify for FHA loans in our area.
This is a quick primer & since I'm not a mortgage expert there is definitely more info that you should know. The lender(s) I will connect you to will help you to understand your financing options & determine which loan package is best for you. A lender will want you to submit all of your information to them & then they will go over your options with you--not the other way around.
What will they ask for in order to give you a preapproval: past two years tax returns, last two or three months bank statements for all accounts, past two or three pay stubs, & they'll run a soft credit pull.
This is a lot of info & a lot to take in--I do my best to provide my clients with different ways to learn about the home buying process so that they feel fully informed & empowered to make ask the right questions + make smart decisions! I'm here to help & to answer questions so take it one step at a time & don't hesitate to reach out to me with additional questions!
Check out my video below to learn about the costs you should be saving--you'll need more than just your down payment.
When you decide to make an offer on a property you will need to decide what to include in that offer. These items are negotiable between the Buyer & Seller. In a competitive Sellers market (which we are currently in an EXTREMELY competitive market), the Seller is going to want the very best terms.
The first two are pretty self explanatory:
Escrow Deposit (this binds the contract & goes towards your cash due at closing--it also is what keeps people from simply terminating & walking away---the higher the deposit the more appealing to the sellers)
But there are additional terms, which we call Contingencies, that you need to decide whether or not to include or to Waive as part of your offer or Contract to Purchase.
There are typically three:
1) Mortgage Contingency: you have a preapproval but you have not actually applied for a loan. In order to apply for a loan you have to have a property under agreement (a contract). Once you apply for the loan the lender will go through all of your documents (bank statements, tax returns, pay stubs, credit report) to make sure that you qualify for the loan. They will also have an appraisal of the property to make sure that it's at market value. Once all of these items are checked off and approved the lender will issue a Mortgage Commitment Letter which states that they will fund the loan. Once that's issued the attorneys & realtors can schedule the closing. We need that Mortgage Commitment Letter by a specific date that is stated on the contract. This entire portion is referred to as the Mortgage Contingency because if your loan is denied you can terminate the contract & get your deposit back as long as that denial is on or before the pre-agreed upon date. Cash buyers waive this Contingency because they do not need a mortgage. Some buyers decide to waive the mortgage contingency in order to make their offer more appealing to a seller---BUT that means that you risk losing your deposit if you get denied the loan.
2) Inspections Contingency: a standard Purchase Agreement has an inspection period of 10 business days for a buyer to conduct any and all inspections. If you are not satisfied with the inspection (or if you just change your mind about the house) you can terminate the Agreement & get your full deposit back as long as it's within those 10 business days. Some buyers will choose to reduce the inspection period as a way to make their offer more appealing to a seller (example---reduce the inspection period to 5 business days). Or some buyer will choose to waive the inspection period completely. You have to be certain that you want this house if you do that! And you have to feel confident that you're willing to take on whatever work is needed. You can certainly choose to have a home inspection after you close on the house--I always recommend that so that you can go through the house & understand it's structural & mechanical components.
3) Appraisal Contingency: Cash buyers tend to waive this contingency because they're not working with a lender. If you are getting a loan & waive the Appraisal contingency it means that IF the appraisal report comes in LOWER than the Purchase Price you will have to make up the shortfall.
Example: Purchase Price $325k; appraised value $320k---this means you have to make up the difference and put down an additional $5k because the bank will only lend based upon the $320k. Does this mean that the house is not worth $325k? An appraisal is subjective & it depends on the comparative houses that the appraiser used. If you have the appraisal contingency in place we want the appraisal report back BEFORE your Mortgage Commitment deadline so that if the appraisal falls short we can either:
a) ask the seller to reduce the purchase price to the appraised value (they do not have to agree)
b) you decide that you still want to proceed & can make up the difference
c) you decide to terminate the contract
Inspired by recent conversations, I want to make sure that my clients are prepared for all of the costs that one will have to stomach when buying a house. For a while it will feel like you're shelling big money out constantly--especially if the house that you're buying needs repairs. So let's go over the upfront costs that you need to have prepared:
Buyers Agent Fee: Guess what? I have good news! This one is a freebie & won't actually cost you anything! I highly recommend that you work with an agent that works directly for you rather than working with the agent that represents the seller. The commission for the sale of the has already been established & in most cases that number doesn't change regardless if you use your own agent or not. You are better off having someone that 100% works for you, negotiates on your behalf, & is on the hook for fiduciary responsibility.
Customized MLS Search: Ok--here's another freebie just to make you feel good! Sure, you can use zillow or realtor dot com or any of the other syndicate sites for free but I can set up a customized search for you that is more efficient to use, allows for communication/notes, & is more accurate. And I can make changes to that search so that we really hone in on exactly what you're looking for. All of those sites pull the info directly from our mls site so go to the source!
Down Payment: This one is straight forward. What's the amount that you can put towards the house that will pay down the principal balance. There are loan options that you may qualify for that start at 0 down payment up to twenty-five percent down. Certainly you can put as much down as you want but the loans will determine the minimum down payment. Your lender will be able to go over the various loan options that you qualify for & I can certainly weigh in on the pros/cons to help you decide what works best for you. Your down payment will not be due until closing day.
Escrow Deposit/Good Faith Deposit: In order for a contract to be valid (or in order to "bind" a contract), you have to put down some cash & this is your deposit. These funds will go towards your cash due at closing (down payment + closing costs). Typical deposits range from 1-3% of the purchase price. A higher deposit may be more appealing to a seller because you have more "skin in the game"--meaning it would be easy for you to walk away from a contract if you only put down $100 for a deposit versus if you put down $10,000 as your deposit. At a minimum you should have $1000 available to put down as a deposit. The deposit is due when you sign a contract to purchase a house so this is the first amount of money that will be required upfront. The deposit needs to be submitted as soon as possible---we don't have a valid contract until your deposit has been submitted. The listing brokerage will hold your deposit. A personal check or bank check is fine for a deposit but note that it needs to come from the bank account of the person(s) who is applying for the loan. Your lender will need a photocopy of the deposit check.
Inspections: Once you have a contract in place to buy a property you will have 10 business days to conduct any & all inspections. The buyer is responsible for paying for these inspections. A general structural/mechanical inspection costs around $500-700. Separate inspections will include Lead, Radon, Water Quality, Septic/Cesspool, Mold/Air Quality--these would all be additional costs if you choose to have any of these.
Appraisal: Your mortgage lender will require an appraisal of the property except in cases where you're putting 25%+ down or in other rare cases. You should plan on needing an appraisal & that's a fee that you'll pay for upfront. In some cases the lender may be able to wrap this fee into your closing costs but you'd need to discuss that upfront. The appraisal is ordered through the lender & the fee is $500-700.
Home Owners Insurance Binder: Your mortgage lender will require that you have a home owners insurance policy in place before they will issue a commitment to fund the loan. You will pay for the first year upfront & subsequent payments will be made by your mortgage company each year. Part of your total monthly mortgage payments will include payments into your escrow account, that' essentially a savings account your mortgage company sets up & sets aside a portion of your monthly payments to pay for your property taxes & your annual home owners insurance policy. But you'll need to pay for that first year upfront. Like the appraisal, some lenders may be able to wrap this into your closing costs so you should discuss this upfront with your lender. Single family insurance policies average $1200 per year in RI, multi family properties range from $2-3k depending on the number of units.
Closing Costs: These are a bunch of fees/costs bundled together. They consist of the fee the lender charges to underwrite the loan, the attorney fee, the fees to record the deed with the City, & any property taxes that are due upfront or that will be put into your escrow account. They may also include any Private Mortgage Insurance (PMI) that you pay upfront, any points that you pay to lower your interest rate, & potentially your appraisal fee & home owners insurance. Rule of thumb---plan on $6-8k for closing costs. Here's a blog post I wrote all about Closing Costs that will go over this in a lot more detail.
Cash Due at Closing: Your attorney will let you know the final total amount that you have to bring to the closing. Usually that's in the form of a Bank Check. Your lender will provide you with an Estimated Closing Disclosure a few days after you've formally applied for the loan--this goes over everything & you have to sign it. It will go over your down payment, the interest rate that is locked in (sometimes they will wait to lock in a rate but you need to understand if it isn't locked in & why), and this will also include the estimated closing costs. I can go over this form with you if you have questions. It can be overwhelming to look at & to try & figure out. The cash due at closing will consist of your down payment plus closing costs minus the deposit and minus any seller credits.
Other Costs: Depending on the loan that you are applying for you may need a certain amount, called "Reserves" in your bank account in order to qualify. This is especially common for FHA loans for multi family properties. The lender will want to show that you have at least 3-6 months worth of mortgage payments available in your bank account. I will help you to identify things about the property that you will need to address right away---perhaps there's a hot water tank that's beyond it's life expectancy (which is only 6 years btw)--people use houses differently so inevitably there will be something that goes awry pretty quickly after you buy the house. It's not bad luck! It's just that you use the house differently. So I'll do my best to identify things upfront, the home inspection will be really helpful for this, so that you can set aside funds to make these repairs right away. I always encourage my clients to keep a house fund of at least $4-6k set aside for emergencies. Work the math backwards from all of this & it gives you an idea of what you need to save & keep in your savings in order to be prepared to buy a house.
Questions? Comments? Reach out! I'm always here to help!
An offer needs to include the following information:
Deposit/Amount of Escrow
Included or Waived Contingencies: sale is contingent upon securing financing (this is called the Mortgage Contingency), property appraising at purchase price, Inspections. These are all items you can include with your offer or state that you choose to waive any of these options.
Additional Terms to include: ex any property or items that are included in the sale (pool equipment); or if you're buying a multi family property do any of the units need to be vacated by the time of the closing.
How do you know how much to offer?
Here are questions that need to be answered:
1) How long has the property been listed & what's the condition of the property? If it's new to the market it's unlikely that the price is negotiable--especially if it's in pretty good condition. If it's a sellers market that will mean that there will likely be a lot of people looking at the property & it's highly likely there will be multiple offers. You and I will discuss how in demand this property is--if I think we can offer lower than the list price I'll certainly tell you that.
2) What are the neighborhood comps (comparable homes that have sold)? I may send you an overview of similar homes that have sold in the area. I'll advise you on what I think the market may be able to bear in terms of offering more than the list price. It's important that you also do your own research to understand the markets in particular neighborhoods as well--I'm certainly here to guide you and also share my expertise.
3) Does the math work? If you don't know how to use a mortgage calculator let me or your lender know. Or ask your lender to run the numbers for you. What's the difference in the down payment amount & total monthly mortgage when you offer $220k vs $230k? If the house is listed at $220k and you love it but there are multiple offers what's the difference in payments at $230k or $240k? You need to understand real estate math so that you can decide what's best for you. Check out my video on using a Mortgage Calculator so that you can truly understand the math!
4) Is there anything that you can do to increase your equity in the property--a basement that can be finished? A bathroom vanity and light fixtures that can be updated? When you purchase a property in a sellers market you should look for a property that has one or two things that you can do to increase or maintain its value in the future. That can impact how much you decide/are willing to offer.
What is an Escrow Deposit & how much do you have to submit?
I have a video on this topic that you can review. If you haven't subscribed to my channel please do so! You have to have some skin in the game, & it has to be substantial enough that you're not going to just walk away from the transaction. Typical escrow deposits (aka Good Faith Deposit) are 3-5% of the purchase price. A higher escrow deposit will be more appealing to a seller so that may be something to consider when crafting a competitive offer.
Here are common questions that I get:
Who holds the escrow deposit: The listing brokerage or the sellers Attorney
Can the seller keep the deposit: If the buyer breaches the contract then yes, the seller can keep the deposit but there are very specific ways that would happen.
Here's how a buyer can get their deposit back.
1) Terminate the Purchase Agreement during the inspections contingency. If you do not waive your right to the inspection then you will have 10 business days to have any inspection, at your cost, that you choose. I have a list of inspectors that I can recommend to you. If you're not satisfied with the inspection then you can terminate the Purchase Agreement & you will get all of your deposit back--as long as we're within the 10 business days. If we try to renegotiate with the sellers but cannot come to an agreement you can decide to terminate the contract.
2) Loan Denial. Known as the 'Mortgage Contingency', the Purchase Agreement will set a specific deadline that you will need a 'mortgage commitment' from the lender. You have a preapproval but you cannot actually apply for a loan until you have a specific property under contract. In order to issue a mortgage commitment, thereby satisfying the mortgage contingency deadline, you have to apply for the loan, submit paystubs, bank account info, tax documents, verify employment, go through an extensive credit check, & the appraisal has to be complete. The underwriter will review all of the information & determine if the bank is willing to underwrite the loan &, if so, will issue a mortgage commitment & then will submit for Clear To Close. If for some reason the bank issues a denial we want that on or before the commitment deadline. This is a date that both you & I will monitor. If we need an extension for that deadline we can make that request, in writing, & the seller needs to agree. If the denial is issued we can terminate the agreement & your deposit will be returned. If you waive the mortgage commitment but end up getting denied for the loan then you would be in breach of the contract because you would not be able to close & the seller would be able to keep the deposit.
When would someone be denied a loan: job loss while in the process of trying to get a loan, submitting incorrect information during the preapproval (this is why you should get a full pre-qualification), making a major purchase during the loan application (like buying a car---no new loans!!), etc. Your lender will give you a list of things NOT to do & it's important that you understand those guidelines.
Disclose your Financing Details
This info needs to be disclosed in your offer. Are you going with an FHA loan, VA (Veteran), or Rhode Island Housing (RIH) loan program? Or are you applying for a conventional loan & if so what is the down payment amount (3%, 5%, 10%, 20% etc). I also need to include a copy of your preapproval. Not only will a seller need to consider the offered Purchase Price, the type of financing is also important as it can impact the appraisal as well as indicate your ability to purchase. FHA loans & RIH loans take longer--45-60 days and have specific items that will not pass the appraisal: ex, a house that has peeling paint on the exterior or windows will not pass & those would have to be fixed before the loan would be approved; Knob & Tube wiring would not pass VA, FHA or RIH & would have to be removed prior to closing; Asbestos Wrapped heating pipes may need to be removed or wrapped prior to closing. These are all things that a seller may not be willing to address & that needs to be taken into consideration. In a sellers market you may want to improve your credit or save more for your down payment so that you can qualify for a 3% or 5% conventional loan as that may inhibit getting an offer approved. All things equal, a buyer with a conventional loan will have a competitive edge over FHA/RIH/VA loans simply because they can close sooner or have less hurdles. I don’t tell you this as a deterrent but simply that we will need to discuss your financing in the context of presenting your offer & the pros/cons of certain loan programs.
Disclose your Closing Date
Your offer will state your closing date. It's important that we understand the sellers motivation for moving & what their plans are. Do they have to find suitable housing or do they already have someplace else to go? Do they want a quick close or is a flexible timeline more appealing?
Once you & I have answered all of these questions I will draw up the offer. In certain instances I may decide that we should submit an executed Purchase Agreement rather than the one page offer. In some cases this may show that we are very serious buyers & that we're ready to go! In addition to your preapproval I will also have you sign the disclosures to include in the package.
The seller will respond in one of three ways: Accept, Counter, or Decline.
If your offer is accepted we will sign a Purchase & Sales Agreement, the formal contract, & you will submit your deposit right away--just like the offer we want to do this as quickly as possible because we don’t actually have a contract until both parties have signed & your deposit is submitted. If the seller makes a counter offer you can either accept, counter with a different offer, or decide to walk away. If the seller declines the offer (or your counter offer) you can try again to make a more appealing offer or move on to find another house.
Does a personal letter make a difference? Sometimes! It’s certainly worth submitting along with our offer. If it's a house that has been "flipped" I don't usually think it makes a difference--the sellers sole intent in that case is usually to maximize their profit.
Check out my video below to watch my video about the offer process!
Owning a multi family property can be a GREAT financial decision but it's not ALL rainbows, butterflies, sparkles, & Unicorns! Check out this video to learn more about what you should keep in mind in you're thinking about buying a multi family property. #multifamilyproperty
Have people told you that being a landlord is awful or just too much work? I'm going to tell you 5 Reasons I think owning a multi family is a great idea!
I'm not a big time investor by any stretch but, I’ve learned enough over the past years to understand how the numbers work, the pros & cons of different types of properties, & what to look for when it comes to multi family properties. I got started by devouring as many books as I could on the topic & then through actually owning properties.
The first thing I love is that buying a multi family property as an owner-occupied investment can allow you to purchase in a neighborhood that you otherwise may be priced out of. For example, on the West End of Providence, single family properties are hard to find Unicorns & that means they're priced pretty high--simple supply & demand. In a single family I'd likely have a steep mortgage to pay on my own, but a property with rental income from a rental unit can allow me to either entirely cover the mortgage from the rental, or to have help covering the mortgage. That may give me an option to move to an area that I otherwise couldn't afford. In fact, that's how I was about to buy three properties on the West End of Providence.
I love that Multi family properties add income to reduce the burden of your monthly mortgage payments! Ideally, a three or four unit property that you live in will provide you with enough income to pay your entire monthly mortgage & escrows--if you're in a high rent area you may even net a little after your expenses! But a two unit property may provide you with more living space--many two unit properties in Rhode Island have one unit that is on one level & the second unit will have two floors of living space-- while the unit you decide to rent out may not cover the entire mortgage it should at least cut it down significantly.
On the other hand, If I’m buying an investment property that I’m not planning to live in, I’m looking for at least a net positive cash flow after all expenses of at least $1000 a month---some investors may expect a higher return but depending on the market & how much cash you have available to put down those numbers will change. You need to learn how to do the math to figure out how to meet your goals--I can help you with that! I’m more interested in specific numbers to set as a goal that I can help people who are getting started understand than cap rates & percentages--if you’re looking for that kind of talk go over to biggerpockets.com Super useful info over there by the way!
Another aspect I love is that you have an opportunity to provide safe & clean housing for people in your community. We all know that there are scumbag & absentee landlords who don’t care about their tenants much less the neighborhood. And believe it or not it can be really hard for people to find housing that is clean, safe, & affordable. You have an opportunity to invest in your community, make a smart financial decision, as well as make a difference in people’s lives.
Want to create your own micro-community? Buying a multi family property gives you an opportunity to buy a property with your friends or family members! Multi-generational living is gaining popularity & multi family properties suit these needs often much better than a single family property with in-law suite in the basement. Millennial buyers & their Boomer parents are pooling their resources to meet their needs while also keeping some individual space. Or close friends are forming business relationships to buy multi family properties together--especially three unit properties where one unit adds income to reduce expenses. The opportunities are only as limited as your creativity.
Number five on my list of things that I love about owning a multi family property is that you can leverage your property for more purchasing power to build financial stability & wealth. My first multi family property was a three unit that I lived in. The apartments were small but the math worked in my favor so that the total mortgage was paid for as well as my utilities. A year and a half later I was able to leverage that property in order to buy a two unit property---say what?
The only reason I was able to buy a second multi family was because I owned the first one. I was able to count the rental income from my current property towards my income plus the potential income of the property I was buying which gave me purchase power I wouldn’t otherwise have had given my meager income--this was when I worked for a non profit with a great mission but very low pay. My first property was obtained through a conventional loan and my second property, which I was going to move into, I was able to buy with a low down payment through an FHA loan. Between the two properties & the rental income from the units both of my mortgages, escrows, & property taxes were paid for. I was able to move from that tiny apartment into a property that was a lot nicer, had a lot more space for me & my kiddos--and it had a yard for the dog they wanted (a year later we got our second Husky!). Two years ago, I was able to purchase a third multi family with three units as an investment property. I had a plan & put those stepping stones in place.
So that's what I love: being able to buy in a neighborhood I'd be priced out of, having rental income to pay or offset my mortgage, having an opportunity to invest in my community & provide safe & affordable housing, creating an opportunity to invest in a property with my friends or family members, & creating an opportunity that builds wealth!
Stay tuned next week for part two: 5 Things I Hate about owning a multi family property! Spoiler alert--I don't really hate anything about it but there are definitely things I wish I had known when I started! Looking for a multi family to buy--let's get started! Reach out--I'm always here to help!
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Buying or Selling? Here's some useful advice!