A quality investors love when purchasing a rental property is what I call "found" space. The thought of bonus space that can be finished into more bedrooms or even an entire additional unit gets an investor's full attention. The additional living quarters translate into money! If the property already cash flows with the existing space, how much more money will be made with additional square footage or an additional unit?
A perfect example of the vagaries of "found" space follows. The St. Paul building was actually 5 units but one of the units was an "obsolete" one bedroom apartment being used for storage and office space by the former owner. The advantages to having an obsolete unit were multiple, but the primary one was that the building could be financed as a conforming residential property (even an FHA ARM) since the appraiser considered it to be 4 units. A conforming loan meant a lower interest rate and lower down payment. If the appraiser had considered the building as 5 units, the buyer would have had to get a commercial loan with a higher interest rate.
The buyer was ecstatic with the appraiser's assessment of the property because it cash flowed as 4 units. The buyer already had plans for finishing the 5th unit and adding another $500-600 to the monthly income. Whoopee! Hooray! Let's get to the closing!
Now, several years have passed and the adjustable rate mortgage has reset making the current interest rate similar to the rate the owner could get on a fixed rate mortgage today. The owner investigated refinancing at a fixed rate assuming the property would still qualify for a conforming residential loan. Ooops! Not only did the addition of the 5th unit bump the property into a commercial loan category, but the loan officer warned the owner of another roadblock. If an appraiser went out to determine the property's value for eliminating the private mortgage insurance and found the 5th unit, the mortgage company might call the loan due immediately! Oh, my.
The owner has just begun his journey into the financing world, and doesn't HAVE to refinance, but the bad news about the private mortgage insurance will cost him a few thousand dollars. In the grand scheme of things, that few thousand dollars will be recouped with the extra rent, but the inconvenience of not being able to refinance or remove the PMI until the alloted time was an unexpected bump in the road. He'll be checking out other avenues and in the future . . . Well, the next "found" space will be turned into extra bedrooms instead of an additional unit!
All I can say is wow. That is a lot of information. I wonder how long it took to come with an article that long and how long you have been pondering on the ideas express here. Thanks.
Posted by: mortgage broker/s | January 20, 2009 at 03:02 AM