Are Investors Welcome? 3 Times You Need to Look for an Investor-Friendly Situation

By: , Contributor

Published on: Jan 21, 2020 | Updated on: Jan 21, 2020

Investor-friendly doesn't mean your neighbors say hi in the mornings. It refers to legal and financial issues you need to understand if you plan to invest in real estate.

Even knowing what it means, the term "investor-friendly" makes me smile, imagining a sunny neighborhood where locals see an entrepreneurial type working to renovate a house HGTV-style and wave, calling, "Good day! How's the repainting going?" not how investor-friendly works, to use a millennial phrase.

In the neighborhood context, it refers to a locality or planned community where the regulations and laws are generous toward people who want to buy a home and rent it out as an income property or to a neighborhood where permitting processes and regulations make it easier on people to buy, renovate, and flip.

In other contexts, such as "investor-friendly lender," it refers to professionals who know the ins and outs of this type of transaction and can support your goals of buying investment property.

Investor-friendly in a rental property context

The first time I heard the term "investor-friendly" was from a real estate agent. We had gone to look at a condo we were thinking of buying as a primary residence. For reasons mysterious to us, the listing agent and everyone else assumed we were planning on renting it out as soon as possible. Turns out, they assumed that because that's what most buyers do. The place would have let us rent between four and six times a year, with no waiting period.

For us, looking for a quiet place to live as a young family, that would have been a less-than-ideal living situation. But, the complex was very investor-friendly in the sense that its bylaws allowed rental property investors to rent once a quarter.

I never found out whether the community officially allowed rental periods of less than 90 days, but if it did, that would have made it extremely investor-friendly. Once you get below 90 days, you're getting into short-term rental (STR) territory, which opens up a whole new potential level of high-turnover income for owners… and a whole new set of expenses and complications for the property manager and staff.

Basically, for rental property investors, the friendlier a place is to you, the more annoying it is for people to actually live there full time. Some smaller vacation towns and resorts have tried to find a compromise that works for owners and investors alike, especially since people living in those communities often want to rent their properties in peak season via vacation rental websites like Airbnb or VRBO. But the needs of year-round residents are different from the priorities of vacationers.

Investor-friendly to fixer-upper flippers

If you're looking to flip homes, then an investor-friendly community is almost 100% not going to be an HOA-governed community. In those, you're dealing with the bylaws and oversight of the association board in addition to those of the neighborhood and city. So, investor-friendly for this type of investment means no HOA, relaxed permit regulations, and city inspectors who are relatively quick to schedule inspections and put the "approved stamp" on work.

An easy quiz: Which statement below implies an "investor-friendly" neighborhood?

  1. Above-ground hot tubs require a permit.
  2. The average wait time for an inspector is three months.
  3. Room conversions do not require a permit.

The obvious answer is #3. Every city or county has its own rules around permitting, and room conversions can go either way. And for people doing fix-and-flips, the fewer interior work permits to pull, the better.

An investor-friendly real estate agent

Almost all real estate agents are friendly to anyone who shows up with a possible sale for them. So don't look just for someone who's willing but for someone who really understands the local landscape. Someone who can say, "This neighborhood may look nice, but city inspectors cruise it waiting to catch people for possible permit violations." Someone who can steer you away from communities with a mandatory 1-year wait before renting and can instead point you to a nice piece of property in an under-resourced but great location that was just designated a "Community Redevelopment Zone" and will shortly be fast-tracking all development and handing out incentives.

An investor-friendly lender

Lenders that deal with conventional loans, and particularly the large, established banks, tend to be much less investor-friendly than non-bank lenders, portfolio lenders, and hard money lenders. This is because big banks are more conservative and more closely scrutinized than smaller or non-conventional lenders.

Non-bank lenders have more leeway but typically still sell their loans back to Fannie Mae (FNMA), so while their criteria are different from those of a traditional banking institution, they may be just as stringent. And lenders in both of these categories are very strict with non-resident owned properties, second homes, and other assets they see as more risky. People who stick with owning just a few rental properties tend to look for smaller banks where someone is personally reviewing the loan rather than letting an algorithm decide.

Speaking of Fannie Mae and the federal programs, the FHA program is specifically meant to help people buy primary residences, so while it is possible to buy an investment property with an FHA loan, many lenders specializing in these loans want nothing to do with investors.

The more you focus on investments and try to scale, the further you'll need to go toward portfolio and private lenders, including hard money lenders. Yes, the interest rates are higher, but many of these lenders look at property deals as a long-term investment for themselves. This gives them a very different way of evaluating deals than lenders that immediately turn around and sell to the government-sponsored enterprises.

This is not about your feelings

When you evaluate a location or person to decide whether they're investor-friendly, do not do it based on questions like "Do I like this person/neighborhood? Would I want to be their neighbor?" Do it based on whether the laws, regulations, and business practices are aligned with your goals.

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