What Are Your Risk-Return Objectives?
Little-or nothing-down finance creates great opportunities for you to magnify your returns. Through smart borrowing, you can quickly pyramid your real estate wealth. But the more you borrow (all other things equal), the larger your risk. When you're highly leveraged, a slight fall in rents may push you into negative cash flows. A relatively small decline in a property's value may cause you to owe more than your property is worth. So steer clear of pie-in-the-sky optimism. Carefully work through the numbers for the deals that come your way. Carefully decide what profits are worth pursuing and what risks to avoid.
If you can't find properties in your favored area(s) that yield sensible numbers, look elsewhere. Increasingly, investors are moving their money from high-priced cities to lower-priced areas (surfloopmet.com).
Maximize Your Leverage With Owner-Occupancy Financing
Now that you've seen the pros and cons of high leverage (little or nothing down), it's time to consider one popular way that you can maximize your leverage (up to your own self-imposed limits): owner-occupied financing.
By far the easiest, safest, surest, and lowest-cost way to borrow all (or nearly all) of the money you need to buy a property involves owner occupied mortgage financing. Numerous high-LTV (loan-to-value) owner occupied loan programs are readily available on single-family homes, condominiums, townhouses, and two-to four-unit apartment buildings that offer 95, 97, or even 100 percent financing. With sterling credit, some lenders will even lend you 125 percent of an owner-occupied property's purchase price. In contrast, if you do not qualify for owner-occupied financing (i.e., you choose not to live in the property), most lenders (banks, mortgage bankers, savings institutions) typically limit their mortgage loans to a 70 percent to 80 percent) loan-to-value ratio.
In addition to lower down payments, lenders qualify owner-occupants with less exacting standards. Plus, owner-occupants pay lower interest rates than investors. If lenders charge 6.0 to 6.5 percent for good credit, owner-occupied loans, the interest rate for investor properties will probably range between 6.5 and 7.5 percent. As a beginning real estate investor, definitely explore owner-occupied mortgage loans to finance homes that will become your future rental properties.