A few short years ago it was acceptable to purchase an income or investment property that with a 20% down payment would simply break even on a yearly basis.  The idea was that appreciation of the property value and rents would create a profit margin in the near future.  I am personally a victim of this investing strategy.  I have two buildings that in 5 years have not yet been able to turn any profits.  There is equity value but that is more like a long term savings account that can only be tapped by selling or refinancing the building.

Fast forward to 2011 and the investing strategy has been greatly influenced by bank requirements.  In the days of old it was okay for the income to equal expenses plus debt coverage (debt coverage is the payment).  Simply put money in is exactly equal to money out.  Almost all banks and investors were very aggressive during the “glory years.”  As time passed and the risk associated with lending money to real estate investors increased so the bank requirements became more stringent and continue to tighten.

The first change required more than 20% down.  It used to be that a 20% down payment was sufficient to purchase investment real estate.  Today it is more common for buyers to put down 25-30%.  This can be a significant challenge to any investor.  5-10 percent can be a significant amount of money depending on the cost of the investment.

The second challenge is that some banks are now requiring more than 100% debt coverage.  I know it sounds like fancy realtor talk, but what they are trying to say is that they want a monthly surplus after the mortgage is paid.  In some cases this surplus can be 30% more than the mortgage payment.  There are two sides to this story just like any other.  If you are the investor it gives your a far better chance to succeed because you should end each month with money in the bank.   However a lot of the money made in rental property investments is the market value of the property when you are ready to sell.  This where real estate investors will struggle.

It is highly unlikely that someone looking to purchase will be able, due to bank constraints,  to come up with a purchase price most sellers will agree upon.   This will effectively drive down the value on most, if not all investment real estate.  The fact that they have to over estimate the monthly payment by 30% will require that the purchase price be low enough to allow this margin.   People want to sell at 100% debt coverage not 70%.

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Looking for an Investment?  Contact me.  I own a few properties, have made the mistakes, and know how to help you win.

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