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What Happens if the Appraisal Comes In Too Low on my Investment Property?

It’s the worst nightmare of every seller — what happens if the property “doesn’t appraise?”

 

Of course, this is a euphemism. It’s not like the appraiser is going to visit the property and then run away to join the circus. (At least, not usually.) No, if you hire an appraiser, that appraiser is definitely going to give you an opinion of that property’s value.

 

So what does it mean if a property “doesn’t appraise?” It means that the appraiser comes back with an appraised value lower than the purchase price on the contract.

 

So what, right? The buyer and the seller agreed to the price; what does the opinion of the appraiser matter?

 

Here’s why the appraisal matters … and why it could be a problem if it comes in too low … 

What Is The Purpose of the Property Appraisal?

Let’s go back to basics — why is the appraiser there in the first place?

 

Yes, appraisers offer professional opinions of the value of the property … but realtors, investors, even most homeowners are smart enough to come up with a pretty good idea of a property’s value. 

 

With homes, it’s particularly easy — you just find out what similar nearby homes have sold for recently. There’s an industry term for this — comparative market analysis (CMA). Realtors do them all the time.

 

So why pay the appraiser?

 

The appraiser is there not for the buyer, not for the seller, and not for the realtor. The appraiser is there for the lender. In fact, if the buyer intends to pay all-cash with no mortgage loan, there’s actually no reason for the appraisal.

 

But if a mortgage lender is going to write a six-figure check with the property as collateral, she needs to know what the property is actually worth. Otherwise, if the borrower defaults and the lender has to foreclose, she may find herself with a lemon property she has to sell at a loss. 

 

So she needs a professional opinion of the property’s value … and that opinion of value needs to come from someone neutral. 

 

The realtor isn’t neutral. He gets a commission if the deal closes.

 

The buyer may not be neutral. She may really really want the property and be willing to overpay for it.

 

The seller is not neutral. He wants the highest price he can get — whether the home is worth that much or not!

 

The appraiser? She has no dog in the fight. The appraiser is the only party to the transaction with nothing to gain at closing (she gets paid either way). So hers is the only opinion the lender can trust.

What If The Appraisal Comes Back Too Low?

Suppose you want to buy a house in Detroit as an investment property. You and the seller agree on a sale price of $150,000. Your lender is willing to lend 80% loan-to-value. 80% of $150k is $120k. All you need to bring to the table is a $30,000 down payment (plus closing costs) and the house is yours! 

 

… except that pesky appraiser comes back with an opinion that the house is only worth $130,000. What to do? You’re still under contract at $150k. Heck, you’re willing to pay $150k because it’s a fantastic location in a growing neighborhood. You think it’s a good deal at that price!

 

… but the lender. The lender was willing to lend 80% of the home’s value … and the appraiser just told her that the value was $130k, not $150k. Based on that appraisal report, the lender is now only willing to front 80% of $130k — or $104,000.

 

Where does that leave you? If you want to satisfy that original $150k contract, you no longer have to come up with a $30,000 down payment … you have to come up with a $46,000 down payment. Remember, the lender is only willing to give you $104k! You have to make up the difference.

 

Do you have the extra $16,000? Are you willing to tie it up? Is the seller willing to renegotiate to a lower price so you still only have to put $30,000 down? This is why “failure to appraise” causes deals to fall apart … and why sellers and their agents try hard to price their listings correctly and only accept offers that will “appraise.”

What If The Appraisal Comes Back Too High?

What if the circumstances are the same as above … but the appraiser comes back with an opinion of value of $170,000? Is the deal in trouble in this circumstance as well?

 

Not at all. Under these circumstances, the lender would actually have been willing to lend more. 80% of $170,000 is $136,000. She will certainly lend a measly $120,000 against this value.

 

Now, this doesn’t mean the buyer gets to borrow $136,000 and only put $14,000 down. The lender will still want that 20% down payment so the seller has “skin in the game.” But, this bodes well for a cash-out refi in the future. 

 

The seller may feel a little salty for accepting a price lower than the appraised value, but he’s under contract. There’s nothing he can do about that. Meanwhile, the buyer has the satisfaction of knowing she got a swimming deal!

 

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One thing you don’t have to worry about when buying investment properties from MartelTurnkey is whether or not the property will “appraise”.” Our conservative analysis, collaboration with professionals, and experience in our target markets means we never price our properties above their likely appraised value. And to take it a step further, at MartelTurnkey we often match appraised values!  And this still results in some screaming deals with no-brainer ROI profiles. 

 

Click here to see what deals we have in our inventory right now — renovated, rented, and ready to start delivering passive cash flow into your bank account on closing day!

 

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6 Things Our Clients Do When They Achieve Financial Freedom

Most investors come to Martel Turnkey on the quest for financial freedom. We dig deeper into what this means in this article, but in a nutshell, it means they have enough passive cash flow from rent income that they no longer have to report to work in order to sustain their lifestyle financially. 

 

What would you do if you no longer had to work? For a lot of people, worn down by the rat race, the obvious answer that springs to mind is “Nothing at all!” But believe it or not, even lounging on beaches gets old after a while. 

 

You have to do something with all that free time. In fact, in our experience, having a plan for that free time makes our clients more likely to actually achieve financial freedom — because they have a clear “North Star”  in mind.

 

Here are six things our clients tend to do after achieving financial freedom once they can no longer stomach another Mai Tai … 

1. Start A Business

Many of our clients dream of doing freelance work, starting a consultancy, or starting a business based on their passions. They never pull the trigger, though, because they craved the security of a paycheck. As such, they remain salaried workers in service of someone else’s vision rather than serving a vision of their own.

 

Financial freedom gives them the safety net they need to take the leap. It gives them the courage to try, fail, and try again. And if the business hits, they can, create jobs, solve problems, add value to the marketplace, and drastically increase their financial legacy

2. Become Stay-At-Home Parents

Many of our clients are parents of minor children, and all of them agree on one thing — life would be a lot more fulfilling if they got to spend less time at the office and more time with their children. 

 

Financial freedom empowers them to be stay-at-home parents. Some of them decide to start home-schooling their children. All of them build stronger relationships and nurture in their children a greater sense of confidence and self-worth. Still others enjoy a significant financial boost simply by eliminating their day-care expenses.

3. Do Charity or Non-Profit Work

Many of our clients wish they could do work that makes a difference in the world outside of solving business problems and fattening up the shareholders’ stock prices. They long for the personal fulfillment of non-profit work … but they can’t absorb that kind of pay cut.

 

Financial freedom enables them to take on the work that matters to them, not just the work that pays the mortgage and fills the college fund. Many are even able to do the volunteer or pro bono work 

4. Take Up Hobbies

Most people have a hobby they always meant to take up. Learn a language, learn a musical instrument, learn a dance style, play sports, practice martial arts, write or paint. Things that enrich your life … but take time and attention. 

 

With financial freedom, you have all the time in the world. The sky’s the limit for the amount of value you could add to your life through new hobbies and interests. Some of our clients become full-on renaissance men and women, chocked to the gills with interesting and amazing hobbies.

5. Travel The World

It’s near the top of nearly every bucket list — see the world! Hard to do if you’re anchored to a job … but easy to do if you’re financially free. You don’t have to request time off … Just book a ticket and go!

 

Some of our clients even go so far as to sell their home and possessions and become full-time nomads, living in hotels and bed-and-breakfasts, touching down in a new magical destination each month. Others downsize to an RV or a motorcycle and become road warriors.

6. Buy More Real Estate!

Just because you have achieved financial freedom doesn’t mean the party is over! Many of our clients become addicted to the thrill of buying new property … but unlike retail therapy, it’s a buying impulse that makes them richer instead of poorer. Why stop at financial freedom? We have a legacy to build!

 

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Whatever you dream of doing after punching the clock is a thing of the past, our job at MartelTurnkey is to help you get there. Check out our inventory of ready-to-go properties, renovated with tenants in place. With our help, you can easily, quickly, and affordably start building a portfolio of passive cash flow — one that will eventually set you free!

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Are Interest Rates Too High to Buy?

One of the big financial stories of 2022 was an end to the historic low interest rates we have enjoyed for more than a decade. The shock is causing people to ask Are Interest Rates too High?

 

Although rates are still below their sixty-year average, last year ended with mortgage rates sitting at nearly double where they had sat at the beginning of the year as the Fed spent the year ratcheting up the cost of borrowing to try and cool down an economy of rapidly inflating currency.

 

If you follow the housing market, you have probably heard that these higher interest rates make it a “bad time to buy.” Is that true?

 

To find a coherent answer, we have to differentiate the way homeowners think about interest rates vs. how investors think about them.

The Effect of High Interest Rates on Homeowners

The main impact of high interest rates on homeowners is that it becomes more expensive to buy or refinance. 

 

Because the mortgage payment is higher on the same principal balance, homeowners and aspiring homeowners tend to put off their purchase or refinance goals because they simply can’t afford it. This is especially true in periods of high inflation, when everything has become more expensive.

 

The one thing that could get homeowners back in the market is if prices start to come down. Those mortgage payments won’t be as high if the principal balance gets smaller. If homeowners catch a dip in prices, they may end up getting a great deal on a home with a lot of headroom to appreciate.

 

That’s why the Fed does the interest rate thing in the first place. Raising the price of borrowing decreases the demand in the market, which causes prices to fall — a counteracting force to inflated costs.

 

We have seen both of these effects in various markets — a slowdown in home transactions, accompanied by a dip in home values.

The Effect of High Interest Rates on Real Estate Investors

Higher interest rates tend to take the wind out of homeowners’ sails. With real estate investors, though, it’s a little different. 

Cash Flow

What happens to your cash flow when mortgage payments become more expensive? Obviously it eats into the cash flow … but that may not be as big a deal for a real estate investor. Why? Because in a time of high inflation, rents may have gone up as well. There could be little net change on the cash flow.

 

Of course, inflation may drive up other costs, like insurance and repairs. Eventually you hit a rent ceiling where tenants can’t afford it and the demand disappears. There are a lot of factors to consider.

 

Of course, investors who bought early enough to take advantage of low interest rates and rent increases are sitting pretty right now. But higher interest rates are not all bad news for real estate investors. 

Appreciation

Same as with the homeowners, investors stand to benefit from a decline in prices that could follow in the wake of a decrease in demand. If the goal of investing is to “buy low and sell high,” watching for prices to dip after an interest rate increase represents an excellent chance to “buy low.”

 

If interest rates ease up within the next year or so (as they are expected to do), you may have the opportunity to refinance into a lower interest rate and a higher valuation — possibly pulling out enough cash to make another property purchase! 

 

When you buy turnkey rental properties, be sure to wear your investor’s hat. Take the advice of many successful investors and think long term.  The house you buy today will definitely appreciate and be more valuable in the future despite any dips along the way. 

 

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Remember, interest rates change minute-by-minute. You could get lucky or unlucky when you lock your rate, regardless of the environment. Trying to “time the market” is usually a fool’s errand. That’s true with stocks, it’s true with real estate, and it’s especially true of interest rates.

 

The better course of action is to establish the criteria — e.g. cap rate, cash flow, projected ROI — under which you are a buyer. 

 

The beauty of real estate is that every market is different, and every property is different. With an expansive-enough pool of properties to pull from, a winning property can emerge from any economic environment … and you can be a buyer at any point in the cycle, adding cash flow and tax benefits to your portfolio.

 

Whatever happens with interest rates, or any other metric, MartelTurnkey will continue doing what it does best — bringing no-brainer, cash-flowing investment opportunities in growth markets to our select pool of savvy buyers. Reach out to us today if you want to be one of them!

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Home Inspection for Turnkey Rentals — 3 Tips to Buy With Confidence

It bears repeating (because most people find it remarkable) — most of our clients buy turnkey rentals from us sight unseen. How can they do it? They get a profession complete a home inspection for Turnkey Rentals.

 

This gives many homeowners and real estate investors heart palpitations — especially those that like to crawl into crawl spaces and scrape every eave with a screwdriver in search of rot before they even think of making an offer.

 

For those who have better things to do than crawl into crawl spaces and scrape eaves, however, that means a lot is riding on the home inspection report. 

 

That sheaf of paper, prepared by a professional home inspector based on a multi-hour visit to the property, is your best glimpse into the bones of the house … and your best indication of whether or not, from a physical and structural standpoint, you’re buying a tank or a lemon.

 

Here are three tips for the inspection stage of your turnkey rental purchase, so you can feel confident about your investment.

1. Screen the Inspector

If you live far away from the prospective rental property, you probably don’t know any local home inspectors. 

 

We can recommend some to you, but it’s important to remember — the home inspector is your guy, not ours. The buyer hires the home inspector, because the buyer is the one with more to lose if the home turns out to be riddled with defects.

 

So take the time to call the inspector and do some due diligence. Make sure (s)he is licensed and has positive reviews online. You don’t have to use our recommendations. If you find someone you like better and the schedules line up, by all means go with the inspector with whom you feel most comfortable.

2. Don’t Be Alarmed By a Long List of Defects

Home inspectors are thorough. Inspection reports, especially those for older homes like the ones we acquire and renovate, tend to identify dozens of defects. You are paying someone to go through your property with a fine tooth comb.  

 

If you have ever bought a home or investment property in the past, you have probably encountered this. That long list can be scary. 

 

Take heart. It’s nearly impossible to make an older home “perfect.” Even brand-new homes have defects. Most of them have little or nothing to do with the economic function of the property, or even yours or the tenant’s ability to enjoy the property. They are just bases the inspector is required to cover.  See something really concerning? A phone call with the inspector can clarify the findings. 

3. Compare the Scope of Work with the Report

We rehab every property that we acquire and bring to market as a turnkey rental. That rehab leaves behind a paper trail — specifically the scope of work, an official agreement with contractors and subcontractors as to what work must be done.

 

We provide a summary of the scope of work for every turnkey rental. When you get your inspection report back, compare it to the SOW.  If something seems to be askew, ask about it. 

 

In other words, the inspection becomes an opportunity to keep things honest — to verify that we actually did the work we told you we did. Isn’t that a good feeling?

 

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Read here for more info about buying turnkey property sight-unseen. Suffice it to say, at MartelTurnkey we fully expect — and wish for you — a robust home inspection process when you buy one of our turnkey rentals. Why? Because we have nothing to hide. Message us today to find out how easy it is to add one of our cash-flowing assets in growth markets to your own portfolio.

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Why Real Estate Appreciates In Value?

We take for granted the notion that real estate appreciates in value. It’s why so many people yearn to be homeowners — not just to have a place that they “own,” but because it turns your personal residence into a vehicle for wealth creation. Not because you pay yourself rent, but because the property itself grows in value.

 

But why does this happen? It’s worth understanding the mechanism behind the appreciation of real estate, if for no other reason that it’s not guaranteed. Real estate can and does lose value. As we speak, some property somewhere in the US is becoming less valuable.

 

Understanding why real estate becomes more valuable (or less valuable) can help us make good investments by only buying property that is likely to appreciate.

 

To figure out why does anything have value let’s go back to Econ 101 — supply and demand. 

What is the Demand?

 

Let’s start with demand. For something to have value, people have to want it or need it in the first place.

 

Real estate obviously fits the bill. People need shelter in which to live … soil in which to grow things … buildings in which to do business. Humans need space, and as long as space is a thing that can be owned, people are going to want to buy it.

Follow The U-Haul Trucks

If you want to pick which real estate is going to appreciate, follow the demand. We sometimes say “Follow the U-Haul trucks” of the people moving out of one city and into another. If a city is growing economically — if big employers are bringing new jobs to that city, if people are flocking to move there in droves, if it’s a burgeoning tourist destination — demand for real estate in that city will almost certainly drive the prices up. Even ugly, outdated, or distressed property will increase in value.

 

What if jobs are leaving a city or a neighborhood? People are moving out? The town is dying? Even the most beautiful homes and commercial buildings will start to lose value, because the demand just isn’t there.

How Much Money Can This Property Make?

Another key factor to the demand for any given piece of real estate is its economic value — how much income can a particular class of property generate? Consider the booming eCommerce industry. It had a profound effect on the value of real estate. Warehouses to store all these products along the supply chain came into heavy demand, so the price of warehouses went up. Meanwhile, with fewer and fewer people shopping in stores, retail property has struggled to appreciate and even lost value.

What is the Supply?

A resource can’t just be in demand to be valuable — it has to be in limited supply too. 

 

Humans have an inelastic demand for breathable oxygen. We need it to survive. So why don’t we have to pay for it, like we have to pay for bottled water or heart surgery? Because (for now), breathable oxygen is in abundant supply. No supervillain has yet figured out how to take us all hostage by monopolizing the supply of breathable oxygen … so despite our insatiable demand for it, breathable air has no market value and remains free.

 

So what about the “supply” of real estate? It’s an old cliche — you can always print more money or issue more stock, but they aren’t making more land. Real estate is a kind of real asset — a tangible resource that is in limited supply.

Inflation 

Let’s talk about printing money while we’re on the subject. Real assets tend to gain value in times of great inflation of the currency (like the one we find ourselves in now). As currency becomes more plentiful, it becomes less valuable. It takes more of that currency to buy things. One of those things you can buy is real estate. Because of inflation, it takes more money to buy the same piece of real estate — meaning inflation has inherently forced its value higher!

What About All That Undeveloped Land?

But is real estate really in short supply? Over 96% of the United States is undeveloped land! Let that sink in. That’s a lot of real estate. Doesn’t that disrupt the supply/demand balance?

 

Not necessarily. Remember, some of that land is on the sides of mountains. Or hostile to the cultivation of crops. Or just so far away that it would be prohibitively expensive to run roads, power lines, water lines, and sewer lines to them. Or it’s just too far away — no one wants to live there. 

 

We come full circle back to demand. Yes, there is a lot of land … but how much of it is in demand, for one reason or another?

The Real Estate That Is Most Likely to Appreciate

We can start to look at the supply of real estate in terms of “pockets of demand.” Suppose a city has a thriving urban core full of arts and entertainment. Lots of people want to live there or open a business there … but there are only so many homes and commercial spaces in that space. The demand is high, but the supply is limited … so that real estate is likely to appreciate.

 

What if a school district is widely recognized as the best in the city? Every family is going to want to live in that school district so their children get the best education. But there’s only so many houses in that neighborhood. Limited supply plus high demand equals appreciation. 

 

You have to be careful about chasing school districts into the suburbs. Thriving suburbs tend to have lots of new houses under development. If builders are constantly adding new houses to the market, they are increasing the supply, which pushes values down. If the demand is strong enough, this may not slow down appreciation, but there’s always a chance that the neighborhood will get overbuilt, with more houses than there are people who want to buy them — especially if a recession hits unexpectedly.

 

By contrast, urban core areas tend to have a much more limited supply. You can tear down old buildings and replace them with new ones, but the property supply is what it is. Homes in nice urban core neighborhoods in growing cities are some of the safest bets for appreciation. 

 

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As you can tell, supply and demand is much more than numbers on a page. It’s a story — the story of a city, a neighborhood, a piece of property. Understand the story, and you can glimpse the future. 

 

MartelTurnkey goes the extra mile to understand the story of every turnkey rental in our inventory. We don’t just buy any property in any city. We specifically look for the markets, the neighborhoods, and the property classes most likely to generate cash flow and appreciate in the near future. 

 

Reach out to us today and let us fill in the gaps so you can invest with confidence — and grow your net worth!

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Are You Getting a Good Deal on Your Investment Property?

“Am I getting a good deal?” It’s a worthwhile question to ask yourself before any purchase, but never better than when considering an investment property.

 

As you become more familiar with a market and its neighborhoods, you will start to become familiar with its fair market values.

 

If you are new to a market, do your research. You have many resources available to help you determine the fair market value of a particular piece of real estate. Here are some places to start:

Free Resources on Getting a Good Deal

1. The “Zestimate” — Auto-Appraisals by PropTech Companies

Property technology (aka PropTech) companies have been working for years to refine a method of accurately appraising the value of a piece of property based on computerized data analysis. 

 

The most famous of these “auto-appraisal” algorithms is the “Zestimate” by Zillow. Search any property address in the US, and Zillow includes an estimate (or “Zestimate”) of its value, extrapolated from property data and data from recent nearby sales.

 

How accurate is the Zestimate? It has a nationwide margin of error of 3.2% for on-market property, 6.9% for off-market property. This adds up to thousands of dollars by which the Zestimate could be off.

 

But Zestimate inaccuracy tends to correlate with bad data. If you have independent verification of the data you find on the Zillow page (square footage, number of beds and baths, lot size, etc.) the Zestimate might be a better guide.

 

Bottom line — don’t stop with the Zestimate, but it’s not a bad place to start. 

2. Property Tax Records

The county appraiser periodically estimates the value of all the real estate in the county for taxation purposes. Property tax records are public and usually available online from the county’s website.

 

Bear in mind that the assessed value is rarely the market value. Counties often assign a percentage of the property’s appraised value as its taxable “assessed” value. It might be 80%, 50%, even 20% of the appraisal. Make sure to note the appraised value and not the assessed value, which could be much lower.

 

The most common occasion for a re-appraisal by the county appraiser is the sale or transfer of the property, at which time the appraiser notes the sale price. If the property has not been sold in years, the county appraisal might be outdated. But if the property sold recently, the county appraisal might be quite accurate.

3. DIY Comparative Market Analysis

The comparative market analysis (or CMA) is how REALTORs estimate home value. A CMA involves comparing the subject property to recent sales of similar properties in the area. There’s no reason you can’t do one yourself. It might take practice, but it isn’t rocket science.

 

To perform a CMA, you need to know what nearby property has sold recently. NOTE — this isn’t for sale, but closed sales. Whatever database you are searching, make sure you are looking at completed sales and not “pending” or “listed.”

 

The closer the property, the more recent the sale, and the more similar the property, the better. Bear in mind that properties are rarely identical. You might need to adjust the recent sale prices for differences between the properties — i.e. more or less square footage, an extra bedroom or bathroom, etc.

 

The most accurate database to search is the REALTOR multiple listing service (MLS). If you don’t have access to the MLS, the next best resource is Redfin, and after that databases like Zillow or Trulia.

 

Here’s an insider’s tip:  At MartelTurnkey, we share pages and pages of homes we have sold over the past years so you can scroll through them to see what houses in specific neighborhoods have sold for. Find these on the Turnkey Rentals for Sale pages.

Paid Resources

4. REALTOR Comparative Market Analysis

If you don’t trust your own CMA abilities, you can hire a REALTOR to do one for you. REALTORs usually offer CMAs for free with a representation contract, but if there’s no chance of a commission for representing you, they may charge a nominal fee.

5. Professional Appraisal

A professional appraisal is probably the most expensive option. It’s also not necessarily more accurate than a CMA. Professional appraisals are more for the lender to determine the maximum loan balance they will approve against the property. 

 

You can order an appraisal even if you aren’t applying for a loan, but in the analysis phase of a real estate deal it’s usually overkill. Don’t worry — if you are applying for a mortgage loan to finance the purchase, an appraisal will definitely happen at some point.

 

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You can use any or all of these resources to verify the market value of the property in the MartelTurnkey inventory of turnkey rental properties ready to go. 

 

Our goal is always to hand over a done-for-you investment with positive cash flow — meaning any MartelTurnkey rental will help you achieve financial freedom through passive income. 

 

But a “good deal”— that is, a turnkey rental at or below market value — could mean more headroom for appreciation … which means more potential ROI!

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Turnkey Rental vs. Multifamily Syndication — Which Is Better?

Multifamily syndication is all the rage in real estate investor circles. If you’re unfamiliar, this is when a group of investors pools their money to buy a large apartment complex. Most of the money partners are “passive” investors, with a person called the “deal sponsor” or “deal operator” putting together and actively managing the deal. In this article, we will compare Turnkey Rental vs. Multifamily Syndication.

 

Turnkey rentals are a kind of passive real estate investment. At MartelTurnkey we do the hard part — acquiring the property and renovating it. Your property manager leases it out and handles the day-to-day. All you have to do is wait for the cash flow.

 

Turnkey Rental vs. Multifamily Syndication

So here we have two passive real estate investment strategies … How do they compare? Which one is better? Let’s compare the two on seven metrics. Spoiler alert — we saved the biggest one for last, so make sure to stick with us to the end.

1. Barrier To Entry

If you intend to finance the purchase with a mortgage (which, as we discuss in this article, you should definitely do) the biggest barrier to entry for turnkey rentals is that you have to personally qualify for the mortgage. This isn’t as hard as it looks, though. If you can qualify for a home mortgage, you can almost certainly qualify for an investment mortgage.

 

With multifamily syndication, the deal sponsor is usually the one who has to qualify for the commercial mortgage. But this isn’t the only barrier to entry. Many deal sponsors have “minimum investment” thresholds of $50,000 or more. Compare that to MartelTurnkey, with initial investments starting in the low $30k range.

 

Some multifamily syndications are only open to accredited investors — people with $1 million net worth (excluding their personal residence) and/or gross income of $200,000 or more. This barrier alone means many multifamily syndications are off-limits to a majority of beginner investors.

 

Advantage: Turnkey Rental

2. Initial Investment

When you buy a turnkey rental, you expect to get a “clean” property. If the sellers were scrupulous with the renovation, you should have no major repairs for years to come. So once you have made the down payment and paid closing costs and fees, that’s it — you’re all in.

 

Multifamily syndications, on the other hand, tend to buy property that still needs renovation. The initial investment includes a renovation budget. If the renovation goes over budget (which is far from uncommon), the deal operator may have to do a “cash call” — ask the investor group to pitch in more money.

 

Advantage: Turnkey Rental

3. Compensation for the “Active” Investor

Some people denigrate turnkey rentals because you’re “overpaying” due to the seller’s profit margin. Why not just buy a fixer-upper and do it yourself? 

 

Remember, though, that renovations can go over budget. With a turnkey rental, you’re paying appraised market value for less work and less risk. Whatever our profit margin, MartelTurnkey strives to hand over a property with positive cash flow on day one, so your risk is minimal.

 

Compare that to a multifamily syndication. The deal operator may take compensation in the form of up-front fees, an ongoing percentage of the rent collected … even a percentage of the deal equity that they didn’t pay for. And remember point #2 — there’s still renovation to be done.

 

Advantage: Turnkey Rental 

4. Return On Investment

When it comes to ROI, the location and the desirability of the property make all the difference, regardless of whether it’s a single-family home or an apartment complex. 

 

Multifamily property has some advantages due to “economies of scale.” Look at it this way — you collect a lot more rent per roof that needs repairing, since eight or more people live under that roof.

 

Of course, the deal sponsor’s fees could eat into that profit margin. Keep in mind, too, that commercial real estate moves in cycles — multifamily may be popular for a few years, then it may shift to industrial, then retail, and so on. 

 

By contrast, turnkey rentals tend to be single-family homes, which are always in demand and appreciate excellently.

 

Advantage: Tie

5. Financing

As mentioned above in #1, with multifamily syndications the passive investors usually don’t have to go through the crucible of applying for the mortgage. The deal operator takes care of that. With turnkey rentals, you have to get the mortgage.

 

Multifamily property may also qualify for “agency” loans from government agencies like Fannie Mae and Freddie Mac, which have attractive terms, including interest-only periods and non-recourse terms.

 

Advantage: Multifamily Syndication

6. Tax Advantages

All the same tax advantages that apply to multifamily property apply to single-family property. 

 

According to most real estate thought leaders, multifamily has a big advantage — it’s more cost-effective to take accelerated depreciation on an apartment complex than on a single-family home. 

 

However, in this article we not only describe what accelerated depreciation is and why it’s so amazing, we also describe how technology has caught up to the point where it may now be cost-effective to take accelerated depreciation on a single-family rental as well. 

 

Advantage: Tie

7. Control Of Your Destiny

One of the biggest advantages of turnkey rentals over multifamily syndications is that you get to call the shots. 

 

When you invest passively in a multifamily syndication, the deal sponsor has all the power. They hire and fire, they set and execute the strategy, they approve repairs and renovations, they decide when to sell or refinance. You have little or no say in any of that. It’s like owning stock in Apple — yes, you might make money, but you don’t get to design the next iPhone.

 

Worst-case scenario — if the deal sponsor turns out to be negligent or crooked, the passive investors could suffer huge losses before finally wresting control back from the errant deal sponsor.

 

With a turnkey rental, on the other hand, you’re the boss. Once MartelTurnkey hands over the keys, our clients are free to change strategies, change property managers, sell or refinance at will — no need for permission from anyone. With a turnkey rental, you are truly in the driver’s seat of your own financial destiny.

 

Advantage: Turnkey Rental

 

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The winner … turnkey rentals! Maybe not surprising, coming from a company called MartelTurnkey, but we’re pretty confident in our logic. We can also back up our confidence with results. Take a look at our property inventory, and if you’re ready to consider investing, reach out to us today!

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7 Real Estate Goals for 2023

REI Goals 2023

It’s a cliche, but for a reason — the end of the old year and the start of a new one is a natural time to reflect on where we are today, and where we want to be this time next year. To help you out we are proposing 7 Real Estate Goals for 2023. 

 

Some people talk about making resolutions … We like to think about setting goals. Depending on your stage in the journey, here are some real estate investment goals to consider:

1. Acquire Property

This is never a bad goal to have on your list. We’re not real estate investors if we don’t acquire property. Whether we’re talking about your first acquisition or your fiftieth, it should always be on your radar to potentially add to your portfolio of real estate investments.

 

Want to know what it will take to acquire a new asset? Check out the MartelTurnkey selection of turnkey rentals for sale. We estimate the all-in initial investment (down payment, renovation, closing costs, everything). This will give you a good baseline of how much capital you will need to come up with to add to your portfolio. 

2. Consider an Exit Strategy

If you already have a portfolio of real estate, consider exiting the investment this year. It may not be the right time … but at least crunch the numbers once this year, maybe even once a quarter. 

 

What is the current value of the asset? See what kind of profit (and tax liability) you might realize from selling it. Maybe you could refinance the loan and pull out cash to acquire another asset. Make sure to estimate how the bigger loan will affect your cash flow.

3. Update Your Personal Financial Statement

Checking in on the value of your assets is a great time to update your personal financial statement. Your personal financial statement is a one-page accounting of your:

 

  • Assets (cash, real estate, investment account balances, automobiles, commodities, jewelry, crypto holdings, etc.)

 

  • Liabilities (loans, accounts payable, etc.)

 

  • Income (employment income, business income, investment income, etc.)

 

  • Expenses (housing payment, automobile payment, any recurring bills or discretionary spending)

 

Lenders will want to see this personal financial statement … and as you make wise investments, it will be fun to watch your net worth and cash flow increase!

4. Expand Your Network

Ever hear the phrase “Your network is your net worth?” Never is this more true than in real estate. The more people you know, the more deals you will discover and the more problems you can solve.

 

Make a goal to add one new person to your network each week — an investor, a vendor, a real estate professional, etc. At the end of the year, you will have added over 50 people to your network.

5. Practice Deal Analysis

Real estate investors need to be able to crunch the numbers on a real estate deal. Set a goal to practice in 2023. This is especially true for new investors, but even experienced investors could benefit from brushing up.

 

Start by downloading the deal analyses we prepare for our inventory of turnkey rentals. Make sure you understand the math we use. See if you can verify the data we use online. We’re happy to jump on the phone and talk you through our logic so you can reproduce it yourself.

6. Improve Your Credit

A great credit score can significantly grease the wheels of your real estate investing career, making it easy to obtain financing at great terms. If your credit score is a little worse for wear, take some steps in 2023 to raise it. These steps could include:

 

  • Reducing the balances on your revolving debt. (Credit cards, HELOC, etc.) How close you are to your revolving credit limits plays a big role in your credit scores.

 

  • Negotiating with creditors. If you have accounts in collections, consider calling the collection agencies and offering to pay in full. They may agree to remove the black mark on your credit score. 

 

  • Acquiring more credit cards. Increasing the number of credit accounts in your name actually helps your score (as long as you don’t max them out and miss payments!)

7. Try Something New

If you have a comfort zone with real estate investing, don’t hesitate to double down on what’s working. But sometimes it pays to step outside of our comfort zone. Try a new investing technique you’ve been meaning to try. You don’t have to dive in with both feet — just dip your toes and see how it feels.

 

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There’s still a little time to get on our schedule for a strategy call before the New Year. Whether you make contact before the celebration or after, we look forward to hearing more about your goals for 2023.

 

Happy New Year from MartelTurnkey! We look forward to a prosperous 2023, helping you turn your financial dreams into a reality.

 

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Everything You Need to Know About Getting a Mortgage for an Investment Property

We have talked about how powerful it can be to invest in real estate with a mortgage loan for leverage. (Missed the article? Read it here.) 

 

That’s all well and good, but how do you get a mortgage loan on an investment property like a turnkey rental house? Is it like getting a mortgage for your personal residence? Is the process different? Are the requirements different?

 

Here’s what you need to know about the process of getting your first mortgage for a turnkey rental or any 1-4 unit investment property:

1. You Will Probably Get a Conventional Loan

A conventional loan conforms with the underwriting requirements of the Federal mortgage banks, FNMA (“Fannie Mae”) and FHMC (“Freddie Mac”). By conforming to these standards, Fannie and Freddie will insure your mortgage, reducing the risk for the lender and opening you up to the best-available terms.

 

FAQ: Are the interest rate and terms different for an investment property loan? 

Yes. The interest rates for an investment property are higher than for a primary residence. That being said, they are quite uniform across lenders. Our preferred lenders will give you the best rates, subject to your credit and qualifications, of course. Your introduction to them is part of our offering. 

2. Investment Properties Aren’t Eligible for a VA, FHA, or USDA Loan

If Fannie/Freddie loans are available for investors, what about the loan programs insured by the Department of Veterans Affairs (VA), Federal Housing Administration (FHA), or the US Department of Agriculture (USDA)? Those loans have even better terms!

 

Unfortunately, they are also available exclusively to people who intend to use the home as their personal residence. In other words, they are off-limits to a turnkey rental or other investment property.

3. You Will Probably Need to Put 20% Down

Depending on the loan program they qualify for, most qualified buyers only need to put 3-5% down on their personal residence. Sometimes it’s as much as 10%. Sometimes, it’s as little as 0% with a VA loan. 

 

With investment properties, however, the lender will almost certainly require you to put 20% down — and the rates get better when you put more down. Duplexes and multi-family properties require at least 25% down.

 

The rationale is that people will work harder and make more sacrifices to keep their personal residence. In contrast, borrowers are more likely to walk away from an investment property if the going gets tough. After all, they don’t live there.

 

As such, lenders want you to have more skin in the game, a bigger equity cushion, and greater security that if they have to foreclose on the house, it won’t be less valuable than the loan balance.

4. You Will Need Stable Income

Lenders only want to write mortgage loans to borrowers with stable incomes. After all, how else can they expect the borrower to make the payments?

 

What about the rental income from the property… does that count? Not really. On paper, you just need the kind of stable income — wages, salary, investments, pensions, annuities, etc. — that makes you look like a qualified borrower for a loan of this size.

 

FAQ: What if I already have a mortgage on my own home? Do I need double the income to get double the mortgages?

Not necessarily. You just need to check the boxes for a borrower on this kind of loan. As you build a relationship with a lender and a track record of success as a landlord, it will get easier. Your lender will start “rubber-stamping” your turnkey rental loans. 

 

But, at some point — a dozen or more properties in — your lender will max you out at 10 conventional loans. At that point,  it will be time to consider refinancing into a portfolio loan or expanding into commercial real estate to grow your empire. 

5. You Will Probably Need a Higher Credit Score

For a personal residence, mortgage lenders can usually get a mortgage loan done with a credit score as low as 620. With FHA loans, the minimum is even lower — in the 500s. The terms may not be the best, but you can still get the loan.

 

For an investment property, you will probably need a higher credit score. 680 or higher is best. If that’s not you, you may need a co-guarantor with a better credit score.

 

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Need help getting approved for your investment property mortgage loan? We can help! Reach out to MartelTurnkey and we’ll get you pointed in the right direction, including an introduction to our preferred lenders who know our business very well.

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Should You Invest in Real Estate with a Mortgage?

When we talk about real estate investing, we almost take it for granted that an investor will use a mortgage to buy the property. After all, many people don’t have the available cash needed to buy or renovate a house or commercial property outright.

 

But some do. Some investors do have that much cash. So why do so many of them still take on heavy debt to buy their real estate investments?

 

We don’t like to take anything for granted, so let’s interrogate the assumption — should you invest in real estate with a mortgage? What are the pros and cons?

Pros of Investing with a Mortgage

 

Less Money Down. For investors who don’t have the money for a 20% down payment or renovation costs, the ability to borrow money to buy investment property is a godsend.

 

Diversify. What if you do have the cash to buy the investment outright? Should you? Most investors don’t. If they have $200,000, they won’t buy a $200,000 property outright; they might buy five properties with $40,000 down payments.

 

That way, the risk is spread out. Even if one property underperforms, the others will probably do fine and one might even overperform expectations, pulling up the portfolio overall. But what if you just buy the one property outright and it underperforms? That’s the danger of putting all your eggs in one basket.

 

Leverage. Investors talk about real estate debt as leverage. It can be a tricky concept to grasp, but once you do it’s extremely powerful. Here’s the gist — you put less money down, but the property still appreciates as much as it’s going to appreciate. If you buy a $200,000 property outright and the property appreciates $40,000, you have increased your wealth by 20%. But if you only put $40,000 down and it appreciates $40,000, you have doubled your money. The property got more valuable, but the debt stayed the same size. You can build wealth incredibly quickly by using a mortgage as leverage.

 

Deductible Expenses. Your mortgage interest is a deductible expense. Additionally, your depreciation expense is the same size whether you mortgage the property or not, so you might as well get the most property cost basis you can.

 

Principal Paydown. Over time, your loan balance gets smaller as you pay down the principal with your mortgage payments, increasing your ownership interest in the property even as the mortgage payments stay the same.

Cons of Investing with a Mortgage

 

More Risk. Once you take on a mortgage, you are responsible for the repayment of the debt. If you hit financial hard times and can’t make the mortgage payment, you risk a total loss of the investment in foreclosure. Investing in real estate always entails risk, but there’s no denying that the less you borrow, the less risk you assume.

 

Less Cash Flow. Even if you don’t hit hard times, a mortgage payment is a big expense that takes a big bite out of your cash flow. It might still be positive cash flow … but if your goal is financial freedom, it might take longer to achieve with the smaller cash flow. However, this reduced cash flow can often be offset by the tax advantages of leveraging real estate.

 

 

Overall, we believe the hype — the pros of leveraging investment property with a mortgage far outweigh the cons. MartelTurnkey can help you identify the right mix of property selection, strategy, and financing to generate cash flow from Day One … and then rinse and repeat until you don’t just have one rental property — you have a whole portfolio!