Published by ThinkRealty | December 20, 2024
Although many experts spent the last few years predicting an economic downturn, the past two years have been good for residential real estate investors
A recent survey of real estate investors found that three-quarters of them were making at least as much in 2024 as they made in 2023 from their investments, and more than 40% were making more than they did a year ago.
In addition, overall performance is beating expectations. Nearly half of investors said they were making more from their real estate investments than they expected.
Several factors are driving this real estate investment boom. Despite a general atmosphere of economic uncertainty, Americans are still moving around the country — most in pursuit of a higher quality of life. That has kept demand for housing high and enabled savvy investors to put their money into profitable properties.
An underappreciated factor in the ongoing investment boom is the presence of mortgage assistance programs that enable investors to buy properties without putting down a lot of money upfront. Similar to homebuyer rebate programs that ease financial pressure for buyers, these programs enable investors to buy properties that might otherwise be out of their reach.
House Hacking With FHA or VA Loans
One of the most efficient and creative financing strategies for real estate investors is to combine “house hacking” with popular government mortgage programs.
Federal Housing Administration (FHA) and Veterans Affairs (VA) loans come with relaxed qualification standards, affordable mortgage rates, and very low down-payment requirements.
Applicants for an FHA mortgage can qualify with a credit score as low as 500 and put down as little as 3.5% upfront, which is much lower than the conventional 15% or 20% required by conventional investment property loans. FHA applicants can also be approved even if they have a checkered financial history that includes a bankruptcy filing or a past foreclosure.
Requirements for a VA loan are even more relaxed. Applicants can put no money down and may be exempt from credit score requirements.
Of course, these loans come with conditions. For VA mortgages, applicants must be active service members, military veterans, or the surviving spouse of a veteran.
For FHA mortgages, the loan limit is quite a bit lower than conventional mortgages, so you’ll be restricted in your choice of property. These mortgages also come with a rule that they can be used only for a primary residence.
Applicants must live in the property they buy with either of these loans. That’s where “house hacking” comes in.
House hacking is the practice of buying a multiunit property, living in one unit, and renting the others to lower or cover the entire cost of the monthly mortgage payment. Investors are allowed to buy a multiunit property with a VA or FHA mortgage as long as they use one of those units as a primary residence.
FHA mortgages can be used on secondary homes in some limited circumstances, but only if you’re experiencing housing hardship.
A Debt-Service Coverage Ratio Loan
A debt-service coverage ratio (DSCR) loan is an unconventional type of mortgage that’s often used on investment properties. The approval process for a DSCR loan looks at potential rental income from the investment property instead of the financial profile of the prospective buyer. If the investment’s rental income will comfortably cover mortgage payments, the lender will be inclined to give you the loan.
This type of mortgage can be a lifesaver for investors who’ve found an amazing investment opportunity but, for whatever reason, would have a tough time getting approved for a conventional loan.
The debt service coverage ratio is calculated by dividing the investment property’s projected net operating income by the amount of annual debt. A ratio of 1 means the projected rental income is equal to the debt payments. A ratio of less than 1 means the income won’t be able to cover the debt payments.
When the ratio is larger than 1, the investment starts to look more appealing. Lenders generally want to see a DSCR ratio of at least 1.2, meaning you’ll be able to make your debt payments with a good amount of cash left over for operating expenses. The higher the debt service coverage ratio, the more cash you’ll have on hand after making your mortgage payments, which translates to less risk for the lender.
