Rental properties are a great investment, when they provide cash flow, but cash flow is not the only thing I look for when I buy rental properties. I want to buy my rental properties below market value. By buying rental properties below market value, it gives many advantages. The most obvious advantage to buying below market is the cash flow is usually higher. Other advantages include being able to refinance properties, sell properties, increase net worth and improve a personal financial statement for lenders.
How can you buy rental properties below market value?
I buy most of my fix and flips and rental properties off of the MLS. In my market I am able to get a great deal by acting quickly, and being a real estate agent also helps me get more deals. You can buy properties from the MLS as short sales, REOs, fair market sales as well as estate sales You can also try direct marketing to sellers that do not have their home for sale yet. We used to buy many properties from the public trustee sale, but competition has gotten so fierce at those sales that prices are higher than MLS!
Increase cash flow by buying rental properties below market value
Cash flow is extremely important to my rental property investing strategy. I don’t feel investors should buy rental properties for appreciation because that can lead to many problems. The cheaper you can buy a property, the less money you will have to invest, and the lower your mortgage payment will be. You can still cash flow on rental properties that are at market value, but there are many other advantages to buying homes cheap.
Buying homes below market allows an investor to refinance
I have refinanced two of my rental properties and both times I was able to take cash out of the property. I am able to do a cash out refinance because I have a great portfolio lender who will allow a cash out refinance on multiple rental properties. My lender allows me to finance a rental property purchase with an 80 percent loan to value ratio, but they will only allow a 75 percent loan to value ratio when I refinance.
Since I have to refinance at a lower loan to value ratio, I have to buy properties below market value or hope for incredible appreciation to take cash out. I also have to wait a year to refinance with my lender to take cash out. On one rental property, I bought the home for $92,000, the home appraised for $140,000, and on another property I bought the home for $91,000, and the home appraised for $136,000. I had to make repairs on these properties, but I was still able to take out enough cash to cover the repairs and much of my down payment.
Buying below market gives an investor instant equity and increases net worth
If you buy a home below market value, as soon as you buy the house, you gain equity and net worth. Net worth is fun to track, but is not real money in your pocket. That doesn’t mean net worth is not extremely important. Tracking how much money you are worth is a great way to start thinking about money and thinking of ways to increase the money you have. I think many people are scared to track their net worth because they are afraid of how low it may be. If you start buying rental properties below market value, it is a great way to increase your net worth and have fun watching the number increase.
Many investment opportunities are only available to people with a high net worth. Banks also love to work with investors who have a high net worth, which I will discuss shortly.
Having trouble finding a great deal on a house? Check out my book Retire Rich and Early with Real Estate, which describes how I buy 10-15 fix and flips a year as well as multiple rental properties. The book is available for free here: Free eBook
Buying a rental property below market value lets you sell a home easily
I don’t plan to sell my rental properties anytime soon, but that doesn’t mean I won’t have to. If I do have to sell some of my houses I want to make the most money I can. If you buy a rental property below market value you will have instant equity and be able to sell a home if you need too. In this article I describe how I could have flipped rental property number 7, but chose to rent it.
If you buy a rental property at market value, it will be very hard to sell due to the costs to sell a house. Once you factor in real estate commissions, closing costs, title insurance, it will be very hard to sell a property that you bought at market value if something happens and you have to sell a house quickly.
How can buying properties below market value let you buy more properties?
If you buy properties below market value, it allows you to spend less money on the property. That leaves more money to buy more rental properties, but that is not the only reason buying below market value lets you buy more properties. Banks use many parameters to decide if they will lend money to an investor. Banks look at credit, debt to income ratio, job history, and an investor’s personal financial statement.
A personal financial statement shows all of your liabilities and assets, which gives you your net worth. The higher your net worth, the more stable a lender thinks an investor is and the more likely they will be to lend money. If you have very little net worth, the bank considers you much more of a risk because if something goes wrong and you stop paying the bank, then the bank will not have any other assets to go after.
Buying rental property below market value is extremely important to my strategy. It makes me more money in the short run and increases my net worth, which allows me to buy more properties with financing. I also can refinance and take cash out much easier if I want more money to buy more properties.
For more information on how to buy the best rentals which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon bestseller.