This morning, I heard the reporters say the government is now considering increasing the minimum down payment to a whopping twenty percent (for real estate purchases). This is for the average home buyer, not just for people wanting to purchase investment properties.
It does not take a rocket scientist to surmise that if this notion passes, it will most likely have a large negative effect on the number of home buyers that can come up with the large down payment and qualify for the increasingly stringent lending criteria.
Is twenty percent down good or bad for the modern real estate investor?
When I first started investing, our massive real estate bubble had not happened yet, and foreclosures were not everywhere. At that time, the typical real estate investor was doing deals that were coined alternative real estate financing. In a nutshell, alternative real estate financing means the real estate investor comes up with ways to either keep the financing intact or to work with the seller (or other private money source) to derive new financing, in order to do the deal. Traditional bank involvement was not necessary.
I'll call this approach the "old school" style of investing. It really centered around the investor's skills to negotiate with the seller (and perhaps new buyer) and to be able to see a profitable transaction where others could not.
In a surprising way, the skills involved to do these deals are probably more advanced than, say the skills to wholesale a bank owned property.
For the savvy investor, it seems that if the government wants to make the lending criteria even more rigid (than today) this will most likely open up more deals for real estate investors. And here's why:
One, the desire to own a home does not diminish even though lending criteria gets more stringent.
Two, there are plenty of potential homebuyers, who have been crushed by unemployment and would want to purchase a property after their financial picture improves.
Three, there are plenty of potential home buyers who are self-employed that find even the current lending criteria almost impossible to get loans.
Four, there are also plenty of homebuyers that have lost their property to foreclosure that would be looking to purchase another property. And with their damaged credit, they would be almost certainly denied typical mortgage loans.
So for the savvy real estate investor, I say let's consider adding the old school style of investing to our current techniques. Life can be a lot easier if you only have to work with sellers and buyers. Note however, that the savvy investor must know how to calculate appropriate offers with these old-school techniques. Major pitfalls can happen if all the transactional details are not appropriately accounted for.
After years of doing these equations by hand, my partner and I have developed a software program that gives us an unfair advantage when computing offers and making deals. We can actually iterate all of the variables, including interest rate, loan terms, rental repair cost, vacancy factors, monthly rent, desired cash flow, and first year pretax cash-on-cash return, while we are on a call with the seller (and so can you).