Owning a home is a big part of the American dream. Investing in and growing wealth through real estate has become an American obsession. Investing a portion of your portfolio in real estate is a great way to diversify your assets and create financial security for you and your family.
Whether your goal is securing rental income, leasing out a vacation home for travelers, or flipping houses- the Phoenix metro is one of the best places in America to invest in real estate. The housing market is in the highest demand this region has ever seen and everyone wants a piece of the pie, so how do you cut yourself a slice without watching your property dreams crumble? Don’t worry, Halpern Residential is here to help.
Here are five things you should know when investing in property in Arizona:
1. Understand Your Investment Financing Options
The first thing you need to figure out is how to secure financing and which type is appropriate for you. There are a handful of options, so you want to talk to a mortgage lender and a licensed realtor to understand what makes the most sense for you when investing in real estate.
A bank loan guarantees a fixed interest rate for a certain period of the lifetime of the loan. 30-year and 15-year conventional fixed mortgage loans are the best options out there. If you’re a new investor, this is most likely the route you’ll want to finance your first investment property. As a rule of thumb, you’ll want to put down 25% or more to secure a more favorable interest rate.
Also known as seller financing, here, the seller takes on the role of a lender. This is a great option if you don’t have enough to put down or if your credit isn’t top notch. Here, you and the seller work out your down payment, interest and all the terms. Everything is negotiated and agreed on between you two. The seller will keep the title to the property until you pay off the loan, in which the deed is then transferred to you. Although this option sounds great on paper, we see the fewest of these as the Seller needs to own the property free and clear and they need to be willing to act as the “bank”.
Home Equity Loan
A Home equity line of credit is perfect if you have created enough equity in a home or property you already own and can use it toward your next purchase. Let’s say you have about $450,000 of equity in your home, a lender will give you about 75% of that equity value so you can use it as a line of credit toward your investment property. Depending on the property you buy, you can either use it to pay for the property in cash or use it toward your down payment. A word of caution with HELOCs is that their initial interest rates are usually good but get progressively worse as time goes on, so these are typically not the best vehicles for long term financing.
A hard money loan is designed for short-turnarounds, for example, if you’re an investor who plans to only flip houses. Also known as a short-term loan, a company or individual offers hard money instead of a bank. Funds become available more quickly than working with a bank. Most hard money loans are also not dependent on an appraisal of the home, which helps you look and feel like a cash buyer to the Seller. The exchange for this convenience and buying power is the fact that hard money loans often come with interest rates around 10-12% and often charge points up front (1-2% of the purchase price) depending on the scenario. They also require up to 30% down in some cases.
As with most things, cash is king! If you purchase your investment property with cash, you will automatically be positioned better than those seeking financing as cash presents the least amount of risk to a Seller. With cash, there are no appraisal or financing contingencies, so you as the buyer are in a powerful position. That being written, don’t let cash go to your head! In a Seller’s market, most Sellers are not willing to concede big price cuts (if any at all) in exchange for your cash – you are simply viewed more favorably and likely to get the deal over those with financing.
2. Identify Your Down Payment Needs
You’ll need to save up for a down payment if you want to invest in property. What you need to put down typically depends on the type of financing you use.
If you go the traditional bank loan route, most lenders require between 20-25% down. The more you put down, the better your interest rate will be. If a Seller is willing to act as the bank for you, they may require less in a down payment, but each situation is completely individualized.
3. Connect with an Experienced Realtor
Licensed realtors know the ins and outs of your desired neighborhood and can scout the best areas to invest in. Find one who’s knowledgeable about real estate investing, like one from our team at Halpern Residential. We’re skilled in helping you choose properties in areas that show strong potential to rise in value.
A realtor is essential and can walk you through what your return on investment, diving into what your potential profit would look like. An agent should run all the numbers to ensure you have enough for your front-end purchase costs like a down payment, inspection and closing. You also want to consider the money you’ll need to flip, repair, stage, remodel, etc. At Halpern Residential, we can help you make an informed and educated decision.
4. Fly In to Scout Potential Investment Properties
Next to owning a home, an investment property is one of the biggest purchases you’ll make in your lifetime. As creatures of habit, we like to see things first. If you’re from out of state, plan on flying in to see your potential investment. While in town, a realtor can also introduce you to potential property managers they trust if you need someone to run the day-to-day property operations when you’re investing in real estate.
5. Prepare to Make an Offer Virtually
Arizona’s housing market is moving very rapidly. While housing wars are cooling off in other parts of the country, Arizona is still active and competitive. That means you may find yourself in the position of having to make a virtual offer or risk losing out on a property you really want. That’s why finding a realtor on the ground you can trust with market experience is key.