So you want to be a real estate investor on the Outer Banks?
As if buying a primary residence isn’t challenging enough, what should you expect when buying your first investment property or second home at the beach? Without proper guidance or experience, you really can find yourself in a frustrating situation. Buying investment property is a phenomenal idea right now as prices, rates and rental income create a perfect combination for purchasing a beach home that will practically pay for itself. So what do you need to know? Check out the list below.
1. Be prepared for 20% to 30% down payment. It’s unheard of in the Outer Banks to buy rental property with less than 20% down. Some lenders may even require as much as 30% down. Now don’t let that figure scare you. Keep in mind prices are down about 35% overall, so 30% of today’s prices is often times less that 20% of 2005’s prices were.
2. Most lenders will allow you to use up to 75% of the projected or established rental income as to qualify for the loan. With that income you may qualify for more than you expected.
3. Use the 17 week rule. If you are nervous about the affordability of a second or investment home, follow the advice of some smart investors. If the home has a history of generating more than 17 weeks of rental a year, calculate all of your expenses for the year and if they can be paid with the 17 weeks of income then it’s a good investment. Most homes with a pool and hot tub will generate at least 18 weeks and some up to 24 weeks, depending on location. If the expenses can be paid with 17 weeks, the rest is money that can be set aside for annual maintenance. This is a very safe rule of thumb.
4. Be sure to find out the flood zone of the property. The entire Outer Banks is actually in a flood zone. However, some areas based on elevation are in flood zone X. No flood insurance is required in flood zone X. You can still purchase the insurance if you choose. As long as the home is not in a COBRA zone, you should be able to qualify for the Federal Flood Insurance which is extremely affordable.
5. You might have to pay a due diligence fee. The new North Carolina Offer To Purchase & Contract now provides the buyer the right to cancel the contract for any reason or no reason during the specified “due diligence period.” This new simplified contract allows the buyer and seller the ability to negotiate a time frame for the buyer to do all inspections and research needed to make a firm decision of buying. For the right to do this, the buyer pays a due diligence fee. The seller assumes the risk of taking the home off the market for this time frame which could easily be 30 to 45 days, so a fee for this time seems appropriate. This fee is always 100% negotiable between buyer and seller and is NOT refundable for any reason other than seller’s breach.
6. Be prepared to pay a slightly higher interest rate. Investment properties and Jumbo loans do run a higher risk, so lenders charge anywhere from .5% to 1% higher for these loans. There are still 30 year fixed loans available for beach properties.
7. If you push off your buying decision until the summer months, you’ll need to be prepared to do all showings on either Saturday or Sunday whichever is turnover day for the properties you’re viewing. You’ll also be fighting the incoming and outgoing traffic! Unless you’re looking at foreclosures only, which are vacant, the weekly tenancies won’t be disturbed for your showing. Spring and Fall are the easiest times to access the properties as they are vacant and not winterized.
If you have questions about buying an investment home on the Outer Banks or would like a cashflow analysis of any available home, contact me!
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