Buy Rental Properties With Uncle Sam's Cash

I don't make jokes. I just watch the government and report the facts. -- Will Rogers

Our government is unleashing an ocean of cheap financing in the hope of stimulating the economy and preventing further deflation of assets, especially real estate. Although most of this government largesse is going to directly benefit large financial institutions, private-equity shops and hedge funds, there are a couple of ways that smaller investors can directly benefit from it and get their fair share.

Fannie Mae(FNM Quote), Freddie Mac(FRE Quote) and the U.S. Department of Housing and Urban Development are offering generous financing terms for the purchase of apartment buildings priced at or above $1.5 million.

In addition, the agencies will now buy the mortgage paper of investor-owned individual rental properties such as condos or single-family homes being used as rental properties, up to 10 properties per individual owner.

The irony of all of this cheap and easy financing for investors in rental properties is that the government is basically trying to replicate exactly the cheap and easy financing that caused the real estate bubble of a few years ago and the current crash.

What is different today is that the spread between the rate of financing and multiple of earnings on rental properties (or capitalization rate) has never been more favorable to investors. (A cap rate for an apartment property is calculated by dividing the current net operating income of the property by the purchase price.)

This is probably a once-in-a-lifetime opportunity for investors to generate current cash flow of 15% to 25% per year by locking in extremely favorable financing from the government to buy rental properties at a time when there are not enough investors willing to step up and buy these properties because of concerns about the economy and falling real estate values.