Did you know you may be shooting yourself in the foot when you buy investment property?
Real estate investors owe a civic duty when buying investment property, most specifically condominiums. As it happens, this duty is also in the enlightened self-interest of the real estate investor.
There is always a greater demand for entry level housing than for mid- to high-end property. Naturally, this is also something of a sweet spot for real estate investors because it is typically the range where properties have positive cash flow. As a result, investors, many all cash buyers, are in competition with the first time homebuyer, many of whom are using FHA financing. Real estate nvestors frequently win - more often than not when they can pay cash and close quickly.
Survival of the fittest you say. Yes, in a truly free market, but… investors should never forget the government’s influence on creating public policy. Tax credits to buy, tax deductions in owning, debt cancellation forgiveness, FHA assistance, and investor waiting period for REO purchases are just a few of the rules in place fostering increased home ownership.
What is the point? Did you know there are specific FHA requirements on the owner-occupancy ratio of a condominium complex? At least 50% of the units in the project must be owner-occupied or sold to owners who intend to occupy the units. (REOs are not included in the ratio calculations.)
If, as an investor, you find and buy a good deal, but that deal now puts the complex below the 50% minimum requirement, then you have just killed your buyer pool*, eliminating all borrowers who might need an FHA loan. Killing your buyer pool kills demand, which kills upward pressure the value of your investment. That’s like blowing off your big toe. Ouch.
On top of this, most lenders are not lending on condo projects if the buyer is a real estate investor. Got the pinky-toe that time. You can’t even resell to an investor unless they are an all cash buyer.
Although some portfolio lenders will ignore the owner occupancy ratio if the buyer will occupy the property and puts down at least 20%, but conforming loans (to be sold into the secondary market) must comply with the Fannie Mae guidelines of 51% occupancy.
Next time you are looking at a possible condo / townhome purchase, look closely at the occupancy. Leave a margin for the FHA condo owner occupancy ratio. You don’t want to shoot yourself in the foot. Invest in real estate responsibly.
* Technically it would be the investor after you, because your unit might be bought by an owner occupant, bringing the ratio back up to the minimum.
+ There are many more FHA restrictions.
