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A Money Play

The opinions expressed by columnists are their own and do not necessarily represent the views of
One of the best ways to make money in the real estate arena is with rental housing.  There
is always a demand for good rental housing, at reasonable prices (rents) in desirable neighborhoods

A substantial amount of money has come out of the stock market lately to purchase single family houses, as well as 2,3 and 4 unit buildings for rental use.  The reason for the units, 2-4, is that they can be financed by Fannie Mae and Freddie Mac as conforming loans and thus are in as much demand as the single family home.

A great number of homes have been purchased for cash giving the investor the maximum return on his or hers investment.  As property values moved up the investors looked to conserve their cash and sought out financing.

The small real estate investor looked for a low payment and generally opted for a 30 year fixed to maximize the net return on the property (after principal and interest payments on the loan is accounted for as well as the payments for property tax and insurance).
With today's low interest rates there is a shifting taking place where the more sophisticated and
wealthier investors are considering a faster pay off for the future and are looking at 10 and 15 year 
fixed rate loans.  The loans are available in the continental U.S. up to the conforming limit of 
$417,000.  In the areas where allowed they can also go up to the conforming jumbo limit of $625,000.  This is for single family houses.  For 2-4 units the limits are as follows:
                  Conforming Limit                     Conforming Jumbo Limit
   2 units       $533,850                                  $800,773
   3 units       $645,300                                  $967,950
.. 4 units       $801,950                                  $1.202.925

For those investors who live in one of the units it then makes the entire building an owner 
occupied project and not subject to the Fannie and Freddie charges for standard rental properties.
Those charges at time of financing are 1.75% of the loan amount for those loans that are 75% loan to value or less.
If the loan to value is over 75% loan to value the charge is 3 points.(3% of the loan amount when you finance or refinance the property). There is also a one point charge for units when being financed whether they are rentals or owner occupied.

Another benefit given to those who live at their multi-unit property and are 62 years of age or older
is the ability to purchase or refinance the property with a Reverse Mortgage.  That means once the Reverse Mortgage is in place there will not be any mortgage payment on it during the lifetime of the owner(s). In the case of a 2-4 unit building the income from the rental unit goes to the owner(s) even though they aren't paying the mortgage.

Now that you have an idea of what motivates people to become landlords let me explain the money play in rental real estate.  Cash flow is the goal, but when to maximize it is the question.
For most investors it has been maximizing from the beginning.  Today's investors see a slightly
different picture.  With short term fixed rates at all time lows, in the high 2% to low 3% range, there is an opportunity to take less cash flow now with the idea of a major increase in the future.

The decision on the financing, and ultimate cash flow, depends on the investor's age, current financial position and long term financial goal(s).  The equation of less now and more later
is an individual one, but one whose time has come.  One can't dismiss an opportunity of this 
magnitude without serious analysis.

There isn't a right answer to this equation, however there is a right answer for you.  Take time,
seek financial advice and find it!

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