ISAACS | COMPASS
INVEST | dc real estate
The Isaacs Team | Compass
Discover DC investment strategies such as house-hacking, flipping, buy & hold and multifamily purchases.
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NW DC
20005
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Your Washington DC Real Estate Investment Compass
House Hack
Generate income from your personal residence. Live in one portion and rent the rest, either short-term or long-term. Ideally, tenants cover the mortgage, owner builds equity.
Fits Classifications:
- One Family Rental
- Shared One Family
- 2 Family Rental
- 3+ Family Rental
Fix & Flip
Purchase below-market priced property requiring updates, renovation or remodeling. Do the work and resell at market rate.
Fits Classifications:
- All types
Buy & Hold
Buy and hold real estate is a long-term investment strategy primarily focused on value appreciation. The investor purchases a property and rents it for an extended period of time, often 5-10 years.
Fits Classification:
- All types
Multifamily
Multifamily properties such as apartment buildings, 2-4 unit boutique rental properties, or duplexes offer multiple spaces for rent and thereby boost net operating income and cash flow. These properties can also realize outstanding equity build, if properly maintained and managed.
Fits Classification:
- Multifamily
DC Accessory Dwelling Classifications & Uses
One Family Rental
Rental of single-family homes, townhouses, duplexes, individual condominium units, or individual rooms (including individual rooms in a residential building that the licensee also occupies)
Shared One Family
Rental of a smgle-family home to multiple tenants who share the property as roommates
2 Family Rental
Rental of a converted basement apartment or carriage house in a single-family home where the main residence is occupied by the property owner, or another tenant
3+ Unit Multifamily
Apartment houses; including the rental of buildings with three (3) or more dwelling units
Conversion
Convert a basement, attic, garage or room(s) into a separate rental unit, creating a two family, shared one family, or two family rental.
Detached Accessory
Freestanding structures on the same lot, separate from the primary residence
Attached Accessory
Accessory Dwellings created by extending the main residence, either adding an apartment above a garage, building out an unfinished basement, or creating a separate addition
Jr Accessory (JADU)
Junior Accessory Dwellings of less than 500 Sq Ft with one bedroom and bath
Chapter 34. Rental Housing
Conversion and Sale
Evaluate NOI
Before purchasing an investment property, evaluate your NOI (net operating income).
Begin with Gross Operating Income (GOI). This includes rent, fees, etc. Then subtract overhead and costs:
- Insurance premiums
- Utilities and services
- Property taxes
- Recurring maintenance/upkeep
- Repairs and replacements
- Personnel
NOI = Gross operating income – operating expenses
*Also consider non-recurring CapEx (capital expenditure) not included in NOI calculation. This could be a roof or HVAC system replacement, plumbing or electrical system upgrade.
Some investors also employ the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) metric to measure potential earnings.
EBITDA = Operating income + Depreciation + Amortization
NOI represents the property’s revenue after operating expenses are deducted. This is not a profit calculation. Profit is what’s left after all expenses are subtracted, from CapEx to debt and interest payments.
Financing DC Investment Property
FINANCING
There are various methods of financing investment property, from self-financing to hard money loans. Each has pros and cons.
DC real estate investors should exercise caution when choosing financing for a property purchase for many reasons:
- Cost Implications: The type of financing chosen can significantly impact the overall cost of the investment. Interest rates, loan terms, and associated fees can vary, affecting the total amount repaid over the life of the loan.
- Cash Flow Management: Different financing options come with different monthly payment obligations. Investors need to ensure that the chosen financing aligns with their cash flow strategy, allowing them to meet their financial commitments without undue strain.
- Risk Management: Some financing options may expose investors to higher levels of risk, such as adjustable-rate mortgages that can fluctuate with market conditions. Investors need to evaluate the risk tolerance associated with each financing option and choose one that aligns with their risk management strategy.
- Long-Term Viability: Investors should consider the long-term implications of their financing choices. For example, a short-term financing solution may have lower initial costs but could result in higher payments in the future. Long-term viability is crucial for sustaining the investment over time.
- Flexibility for Property Types: Different financing options may be better suited for specific types of properties. Investors should consider the nature of the property they are acquiring and choose financing that accommodates its unique characteristics, whether it’s residential, commercial, or multifamily.
- Market Conditions: The state of the real estate market and broader economic conditions can impact the availability and terms of financing. Investors need to be aware of market conditions and choose financing that is suitable for the prevailing economic environment.
- Exit Strategies: Investors should consider their exit strategies when choosing financing. For example, if they plan to sell the property after a short period, financing with prepayment penalties may not be ideal. Understanding how financing aligns with exit strategies is crucial for maximizing returns.
Selecting the right financing is a critical aspect of real estate investment, influencing costs, risk exposure, and overall success.
Exercise due diligence and consult a financing expert when evaluating financing options in order to make informed decisions that align with your investment objectives and financial capabilities.
Types Of Financing
Hard Money Loan
Hard money lenders underwrite their loans based on the property value instead of the borrower qualifications mortgage brokers require.
Cons:
- Lower loan-to-value ratio
- Higher interest rates due to lender risk
- Can prohibit owner-occupied residences due to property rules/regulations
DSCR Loan
Debt Service Coverage Ratio loans allow you to qualify based on the property’s cash flow rather than your income & tax returns.
The debt service coverage ratio is a ratio of a property’s annual gross rental income & annual mortgage debt, including principal, interest, taxes, insurance +HOA. Lenders don’t consider management, maintenance, utility, vacancy rate, or repair costs in the calculation, but you’ll want to.
Cons: Down payment can range from 20% – 25% + lender and service fees ranging from 0.5% – 1% of the loan. DSCR mortgage rates are typically 1% – 2% higher than those of traditional loans.
Seller Financing
The homeowner finances the purchase for the buyer and sets the loan terms. No funds pass to the buyer, instead the seller extends the borrower credit equal to the purchase price of the property, then the buyer makes monthly payments of principal and interest until the note is paid in full.
Cons:
- Higher interest rates,
- Potential balloon payment at the end of 5 to 10 years
- Risk of seller default
Cash-Out Refi
A cash-out refinance pays off the initial mortgage, ‘refunding’ home equity to the borrower and establishing a new, higher value mortgage.
Commonly used as leverage for BRRRR.
Cons:
- Required percentage of equity to qualify
- Higher payments must be considered
- Property taxes will increase
- Less flexibility for a sale if needed
FHA 203K
FHA 203k loan investment property loans are restricted to the purchase of a multi-unit property in wihch the investor resides. This type of loan is not viable for fix-and-flips or building a large portfolio of investment properties. Buy and renovate, construct, or convert a 2-4 unit multifamily property and occupy one unit as your primary residence for at least a year.
Rent a home you still own with an FHA mortgage if:
- You occupied for 12 months
- You moved for an acceptable reason (work relocation, upsizing)
Pros: Lower interest rate
Cons: Living adjacent to tenants, likely one-time loan use & fees:
Upfront MIP of 1.75% + annual fees of 0.35 of outstanding principal.
Private Money
Aside from friends, and family, private money loans can be sourced through local real estate investment networking. Find networking groups and events in DC Metro via BiggerPockets.com.
Terms and interest rates on private money loans can vary significantly, from extremely favorable to predatory, so know the laws, variables and your own value as a borrower.
Security usually consists of a legal contract that allows the lender to foreclose on the property in the event of default. Tread carefully and consult an experienced real estate attorney.
Cons:
- Risk of default
HELOC Credit Line
A revolving line of credit is drawn on your investment property, with a typical draw period of 5-10 years. Minimum payments are made to cover the cost of interest, which you only pay on the amount drawn.
HELOCs are typically offered with a variable rate, so timing of a HELOC is important. The interest rate may start low, but rise with the benchmark rate. This an also work in the reverse, meaning your rate may lower. Monthly payments rise and fall with the rate, which is usually lower than a home equity loan, credit cards or a personal loan.
Cons:
- Interest may not be tax deductible
- Variable rate depends on benchmark
Home Equity Loan
A home equity loan is a lump sum loan against the equity in a property.
It is typically offered with a fixed interest rate, meaning the payment is the same each month. The home equity loan payment is made in addition to your primary mortgage payment.
Cons:
- If property value declines, you may be in a negative equity position
Blanket Mortgage
A blanket mortgage funds the purchase of multiple real estate properties inclusively, with a single monthly payment and interest rate. Valuable if the loan offers exceptional terms. With a single mortgage, your portfolio and mortgage payments are simpler to manage, and multiple lending fees are avoided.
Properties can typically be extracted from the blanket for sale or refinance. Check for a release clause. The remaining properties are still covered by the blanket loan.
Cons:
- The properties are used as collateral for one another. If you default on the blanket loan, they all may be lost to foreclosure.
Cash Purchase
The simplest way to finance property is to pay cash. This can put the investor in an advantageous negotiation position, allows waiver of contingencies, lowers settlement costs and facilitates a fast close so work on improvements or rental advertisement can begin quickly.
There’s no risk of foreclosure with a cash purchase, and owners experience less stress when it’s vacant due to low overhead.
HELOC Credit Line
A revolving line of credit is drawn on your investment property, with a typical draw period of 5-10 years. Minimum payments are made to cover the cost of interest, which you only pay on the amount drawn.
HELOCs are typically offered with a variable rate, so timing of a HELOC is important. The interest rate may start low, but rise with the benchmark rate. This an also work in the reverse, meaning your rate may lower. Monthly payments rise and fall with the rate, which is usually lower than a home equity loan, credit cards or a personal loan.
Cons:
- Interest may not be tax deductible
- Variable rate depends on benchmark
Home Equity Loan
A home equity loan is a lump sum loan against the equity in a property.
It is typically offered with a fixed interest rate, meaning the payment is the same each month. The home equity loan payment is made in addition to your primary mortgage payment.
Cons:
- If property value declines, you may be in a negative equity position
Why finance
Leveraging real estate financing allows investors to claim 100% of the cash flow, tax benefits + appreciation in property value with a small down payment, typically 20% of the purchase price.
Other benefits include:
- Deduct interest & reduce taxable net income
- Potential risk reduction through diversification of investment capital across several properties vs a single property
- Increased returns on the amount of cash invested by using financing
Investors using 30-year, fixed-rate mortgages can lock in advatageous interest rates to hedge against future rate increases.
Why cash
Paying cash for investment property can produce higher cash flow since there is no monthly mortgage payment.
To determine your potential ROI, calculate the Cash-on-Cash Return:
Determine your annual pre-tax cash flow: (gross scheduled rent + other income) – (vacancy + operating expenses + annual mortgage annual mortgage payments). Then, divide pre-tax cash flow by total cash invested = CoC.
Disclaimer
Our Investment content is posted for informational purposes only and should not be construed as investment, financial, legal, tax, or other specialized advice. We not financial advisors. Seek advice from professional legal, financial, taxation, or other experts before making investment decisions.
THE SAFE ACT
The SAFE Act also applies to private lending and seller financing. The Act is designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators
The Act defines “loan originator” as “an individual who (I) takes a residential mortgage loan application; and (II) offers or negotiates terms of a residential mortgage loan for compensation or gain.” Section 1503(3)(B), entitled “Other Definitions Relating to Loan Originator” provides “For purposes of this subsection, an individual `assists a consumer in obtaining or applying to obtain a residential mortgage loan’ by, among other things, advising on loan terms (including rates, fees, other costs), preparing loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan.
Visit our Tools page Owning DC Investment Property for more valuable information
Resources
DC Rental Licenses
Rental of a D.C. single-family home requires a One Family Rental License for each rental unit. Applies to dwellings such as houses, condo units, townhouses, duplexes, even individual rooms within a home. OFR License applications do not need to list Certificate of Occupancy information.
Basement apartments require a Two Family Rental License, which also requires a Certificate of Occupancy.
Basic Business License
Basic Business License. Submit online. You’ll be asked for general business information, EIN, tax registration number and Certificate of Occupancy number.
PRO TIP
You can pay a registered agent to help you manage the licensing process, renewals, etc.
Registrations
LLCs & corporations must register with DC’s Department of Licensing and Consumer Protection (DLCP).
The Employer Identification Number (EIN) is issued by the IRS. You are required to have this number if you are a registered business and are applying for an DC license.
You must also register with the Office of Tax and Revenue. Your registration number is required for a Basic Business License.
Clean Hands Cert
Clean Hands Self-Certification
Your signature-verified statement that you don’t owe District of Columbia >$100. in taxes, fees, fines, etc.
Inspection
Following application approval, the property must be inspected by the DC Inspections & Compliance Administration within 45 days of issuance of your One Family Rental License.
DHCD Registration
Finally, register your rental property with the Dept of Housing & Community Development Registration (DHCD)
As of October 23, 2023, all new Certificate of Occupancy applications will be processed through the DOB’s Certifi digital platform. Learn More
DC REAL ESTATE INVESTMENT
Start With The Basics
Whether you’re investing in DC real estatae as a side hustle or full-time business, understanding the local real estate market and fundamentals is key.
How We Help
- Guidance and education
- Off-market opportunities
- Skill, expertise and experience
Assembling A Team
Having a team of professionals in place will ease acquisition and managment of your investment portfolio.
Your Realtor, lenders, property manager, contractors and vendors functioning as a team can identify opportunities, speed transitions, address issues, and increase profitability.
Ready to make a new investment in yourself?
