By David Reed
Investing in rental property is a way for many to take advantage of monthly cash flow while seeing the asset increase in value over time. There really isn’t any type of investment that provides both benefits as rental property can. That’s why many diversify their portfolios to include real estate. However, sometimes it can be a bit expensive to come up with the necessary down payment and closing costs as well as identify a property that will cash flow each month.
With rates still flirting with record lows, now might be as good a time as ever to make the leap and purchase your very first property. Some real estate investors like to partner with others to spread the risk around a bit while at the same time being able to afford a property that might just be out of reach. Think of a four-plex or an apartment building. If you’re thinking of investing in real estate with others, there are some things you need to know.
When just two people buy a rental property, such as a husband and wife, lenders review the income and credit of each. Income and debts are added together to arrive at a proper debt ratio. As it relates to credit, lenders use the lower middle score of the two. Lenders will obtain a credit report and scores from each of the three main repositories, Equifax, Experian and TransUnion. Of the three reported scores, the lender will use the lowest middle score of the applicants. When multiple parties are buying, a different approach is taken.
Each buyer will complete his or her own application. The lender then documents all parties in the same fashion. The buyers will provide copies of their most recent paycheck stubs covering a 30-day period. The last two years of W2s will be provided along with copies of bank and investment statements providing verification of sufficient cash to close the transaction. If there are five couples buying a rental property, you can already tell that’s going to be no small amount of paperwork. Each and every buyer must submit the proper paperwork.
However, the lender cannot proceed until all parties have submitted the necessary documentation. If there are 10 buyers and nine have properly completed an application, nothing can go forward until that final person complies with the lender’s documentation request. You’re going to have to rely on everyone to get their paperwork in on time. Just one person can throw a monkey wrench in the plan.
Second, and this is just as important if not more so, credit reports and scores will be reviewed for each of the 10 applicants. Just like lenders underwrite a couple and use the lowest middle score of the two, lenders will identify the lowest middle score of the 10 applicants. If nine people have scores above 740 and one has a score of 600, the lender will want to scrutinize the transaction a little further. In such an instance, that one remaining investor might want to pull out of the transaction allowing the purchase to go through. To avoid this possibility, all parties should pull an individual credit score on their own at www.annualcreditreport.com. This website is sponsored by all three credit repositories and allows consumers to get a free credit report each year.
Finally, there should be a person or two to monitor the application and facilitate the process as it moves along. If there is someone that is slow getting documentation in, that individual should be responsible for contacting the others letting that person know they’re slowing things down as well as keep all applicants up to date on the status of the loan.
It can be a good way to expand your portfolio by investing in real estate with others, just a bit more due diligence is required.
Let me guide you in achieving all of your real estate goals. Even in these uncertain times there is plenty of activity with families moving and homes are closing! I will put my years of experience to work for you…. knowledge, expertise, professionalism, reputation 508-735-5161, [email protected].
Elaine Quigley, CBR, CRS, GRI
57 East Main Street, Suite 217
Westborough, MA 01581
Cell: (508) 735-5161