Investing in property in the Houston and Katy areas requires extra skill and savvy. Naturally, you’ll be looking for a property that’s going to be profitable, but investments in this region can easily turn into money pits.
These are the primary considerations when you pursue real estate profits here.
In a previous blog post, we discussed how to find profitable rental properties in the Katy and Houston areas, and the premise bears repeating: “Rental properties have the potential to bring steady cash flow and lucrative profits to you as an investor. Choose the wrong property, though, and you’ll be looking at a steady drain on your finances that can put you out of the investment game forever. Knowing what to look for when choosing a rental property to invest in is the key to avoiding this enormous mistake.”
But it’s not the only key. Whether you’re flipping houses or collecting rental properties, you’ll want to think about such factors as neighborhood, location, nearby schools, job market, condition of the house, nearby amenities, and resale potential.
All of these contribute to the effectiveness of the sale. But beyond those familiar elements, something else is perhaps even more essential than a great property, and that’s a great mortgage.
The biggest expense you’ll face with any property is the purchase price. When you’ve been approved for a mortgage, you might well be paying it off for decades, and accruing interest on the remaining balance the entire time.
True, interest rates are lower than they’ve been in almost a decade, and it’s getting easier all the time to secure a long-term loan. But not everyone lands a great mortgage with a decent interest rate that allows a profit from the investment.
Choosing the right mortgage could mean the difference between seeing monthly revenue and enduring monthly losses via the payments. Before deciding on the mortgage, consider all your options. Below are the typical types of mortgages investors face.
Most banks offer you two choices for the term of your loans: 15 years or 30. Some investors simply lack adequate credit or monthly funds to qualify for a 15-year loan, so they have to settle for a 30-year.
People who have great credit and wish to pay off the loan faster with less interest may select a 15-year-mortgage. Many investors believe a 15-year-mortgage is a better investment because you end up paying less interest in the long run.
This can be true: If your rental brings in enough to cover your monthly payment with some left over, this can be a great option.
However, with investments you have to weigh the opportunity cost. You might pay less interest over the long run by taking a 15-year-mortgage, but if you have to struggle to keep up the payments and make little profit, a 30-year-mortgage can be a better option, because it lowers your monthly payments so you can bring in more cash.
You’ll also need to choose the kind of interest rate. Again there are two basic types: fixed and adjustable. The interest rate will dictate whether your interest rates change, how much you pay per month, and how much interest you’ll pay over the life of the loan.
A fixed-rate mortgage is a fully amortizing loan in which the interest rate remains the same no matter what. Your monthly payments won’t change unless there are specific, extenuating circumstances outlined by the bank. The downside is that an adjustable-rate mortgage generally offers lower rates, though they may rise over time and surpass the fixed-rate mortgage.
An adjusted-rate mortgage can move up or down, depending on a variety of factors that can shift interest rates. Thus, you might get a higher interest rate than a fixed rate, or sometimes it will be lower. Usually, after the fixed-rate period ends, the interest rates will fall, and allow your monthly payments to decrease too. But there is a chance the rates will rise. The unpredictability of this approach makes it harder to know whether you’re getting a good deal or the short end of the stick.
In some cases, you might be offered a hybrid option. This occurs when you switch between a fixed mortgage rate and an adjustable one. There are a lot of factors that apply, particularly when it comes to your personal information. It’s best to speak with a loan officer directly about whether you quality for this option and if it would be wise.
Choosing the type of interest rate depends a lot on your payment history and your personality. If you are comfortable with risks and have the funds to back it up if things go wrong, you may be good with an adjustable-rate mortgage.
It can mean lower payments, which can work well for your Katy property investment. If you prefer the stability of knowing how much you’ll pay every month, year after year, go with a fixed-rate mortgage.
The type of loan you choose also has a bearing on your ability to pay it back and make a profit. Mortgage loans are usually categorized into conventional, FHA, or special programs loans, based on the size of the loan and whether it’s part of some government program.
The choice will affect the amount you need for a down payment, how much you’ll pay for the entire loan, and your borrowing limit.
A conventional mortgage is a private loan not guaranteed or insured by any government agency. It’s typically fixed in its terms and rates. Most people have a conventional loan because they don’t qualify for government help and they generally get lower interest payments. It’s typically for 30 years and requires at least a 20 percent down payment.
An FHA mortgage is insured by the Federal Housing Administration. It includes mortgage insurance that protects the lender from a loss if the borrower defaults on the loan. It often features attractive interest rates and more flexible qualification requirements, such as a down payment as low as 3.5 percent. The catch is, you have to have a great credit history and meet other stipulations to qualify.
A special programs mortgage is anything offered or guaranteed by a special private or government-based organization. These programs are typically designed to help low-income families purchase homes by assisting broker fees, closing costs, and other items. For an investor who’s just getting started, this could be a great option.
Ultimately, the best loan type usually depends on what you can qualify for. If you’re not strapped for funds, you probably won’t qualify for government-backed loans and must opt for a conventional.
If you’re looking for lower payments and less interest overall, conventional loans are nearly always the best option. Because you put down so much in the beginning, this also gets you the lowest interest rates. For property investors, low interest means greater monthly profit.
Whether you’re seeking help to choose the right mortgage, selling a property in the Houston or Katy area, or managing your rental for increased profits, Green Residential can help. We offer a variety of investment property services that will guarantee you higher profits.
For more information about the services we offer, contact us today!
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