Just recently, an investor client followed my suggestion and consolidate all his loans. He had seven loans and we turned them into two loans on two properties so he had room to buy more real estate. That won’t happen again as the allowable LTV in investment real estate cash-out loans has been reduced from 90% to 75%, making the above almost impossible. Now that I have talked about the “small” costs of being an investor in real estate, let me get serious. If you are interested in a duplex, the additional cost is 1/2 of a point, while a tri-plex or four-plex has an additional 1 point cost.
Let’s add this up. If you are buying an investment property, your minimum points to Fannie Mae and Freddie Mac are 1.75 and your maximum (3 or 4 unit with 19% down) would be 4.75 points. On a $400,000 property we are looking at $7,000 to $19,000. But that is just for starters. If your credit score is below 720, and you don’t want a 10- or 15-year fully amortized loan or a 40% down payment, there are additional cost for your FICO/LTV relationship. The hits (costs) will range from .5 point to 2.75 points. And the beat goes on! All of these costs are before any cost to buy down the loan or the closing costs associated with the loan. On that $400,000 loan, you have costs of $12,000 to nearly $30,000 to fund the loan for a non-owner occupied house or units. That seems like a pretty good deterrent to anyone thinking about investing in real estate.
Now that you have made it through all the boring and factual info, what does this all mean? These fees show how diligent we are in closing the barn door once the horse has gone. We are saying to the regulators that we aren’t ever going to let this housing crisis again, so we’ll soak “speculators” and “house flippers” with big upfront costs. That way, we’ll stop their “buying sprees” which inflate home prices and load up the system with dodgy mortgages…right? Not so fast, friends. A lot of people who own multiple income properties are average, hardworking Americans who are investing in real estate for their families’ future. They are not big companies, con artists or slumlords. So, is overcharging such ordinary investors the way to prevent another housing collapse? A resounding NO! Now that we have taken the fluff out of the value of houses, why are we being extra-careful to tamp down speculation when it wasn’t being done before when prices were vastly higher? News flash: we need more homes sales, not fewer.
People who feel that Fannie and Freddie are correct in discouraging the purchase of investor real estate had better make sure they have good financials, plenty of reserves and a very low cost of living because this crisis could easily become long term. If real estate stays in hibernation, you will quickly see how the ongoing ripple effect can turn into a tidal wave of problems in this economy. The simple solution is to help those who can help the real estate crisis—in other words, to motivate home buyers by giving them reasonable access to capital. We are subverting this solution by looking to punish anyone who remotely fits the profile of the “housing offenders” continuously dredged up by the media—people who bought too much real estate, people who took on too much mortgage debt. I close by asking a simple question: where are our leaders?