It’s not rocket science, it’s not something that is unheard of, and it’s not some illuminati top secret that is withheld from the masses. We all know, that many of the wealthiest people in the world became wealthy through real estate investing. Many of these real estate tycoons started with just one property that grew into an empire.
Just like with other forms of investing, real estate investing is risky. And, just like with other forms of investing, with the high risks you will also get high rewards, if done properly.
Here are some beginner real estate investor tips for those who dare to venture into the property owning world.
Are you up for it?
Seriously, you have to be in it to win it! Seeing that you are green in all this, you probably don’t have tons of funds to spare. You probably want to penny pinch as much as possible to make things work and maintain low expenses. This would mean that you would need to be a bit of a handyman or woman. This would mean that you would need to know how to fix that leaky faucet, patch a hole or two, and do some painting. Of course, if bigger things arise you will need an expert. However, when the little things come up, you would need to know how to take care of it in order to keep your expenses low and have more of a profit. So roll up those sleeves and get a little dirty!
Stick close to where you live
I am assuming that, just like with the above mentioned tip, you don’t have a lot of funds to spare. So it would make more sense to have property within a 2 hour radius from where you live, no? This way when there is an emergency, and it happens, you will be able to rush over to your rental property and get it taken care of without having to book a flight, book a hotel stay, book a train ride, or pay for a long distance bus. As you get better at it and build your experience as well as grow your property portfolio, you will be able to venture out further away from home and even possibly hire a property manager.
Jump in without the debt
You are going to have a lot of expenses to deal with when you have an investment property. Things break, bad tenants, updating, and ongoing expenses will chip away at your profits. Unless you have tons of funds set away for an emergency, you shouldn’t have any lingering debt when you start your investment journey. Clear up those student loans, personal loans, and large credit card debt before looking into an investment property.
Beware of the higher down payments
You may think that you can get an investment property with as little as 3% down. I am sorry to burst that hopeful bubble of yours but that won’t happen. Generally, at least here in New York City, you would need at least 25% down. You also don’t have the luxury of mortgage insurance for investment properties and so, you are held at a higher standard from banks to get a loan approval.
Beware of the higher interest rates
Unlike traditional mortgages for residential properties, investment property mortgages come at a higher rate. This effects your buying power and your monthly payments. Since you have to worry about expenses and having a healthy margin of safety, you will have to look for properties that are cheaper to offset the interest rate in order keep your monthly payments down.
Make yourself look good to banks
Along with paying off debt, ensure that your credit looks good too. Investment loans are more strict than using a traditional loan remember? That goes for your credit too, so getting away with a lower credit score might not cut it for investment purchases like it would for traditional residential purchases.
Margin of Safety
Just like with other forms of investments, you have to keep a healthy margin of safety with investment properties. Sure, homes can go down in value. Just like with stocks and other forms of investments, you may choose a property that looses its value suddenly due to an unsuspected change to the real estate market. I however think that more important for you to be able to keep up with your monthly payments. House values rise and fall in cycles but not the monthly payments. If you can’t keep up with it, you will end up loosing the property.
Stay away from fixer uppers
Unless you are a contractor or have the knowledge and skill to tackle such a feat, I would advise to stay clear from this for now. Sure, you may think by buying a sweet deal on a place that needs major work would be cost effective but it isn’t. Repair items can add up and so can the people you hire to do the repairs.
You will have expenses, tons of them. If you are trying to rent it on your own without using a real estate salesperson or broker, you will have to worry about marketing and advertising as well as credit and background check fees. You will also have to worry about ongoing expenses like: property insurance and taxes (which may or may not be a part of your mortgage payments or in escrow), utilities, maintenance, and accounting and legal services. You will also have to keep in mind for any sudden repairs or pest control.
Location, location, location
Location means everything with real estate including investment properties. Look for areas with lower taxes that has a good school district, low crime, and growing employment. It should also be close to local amenities like shopping and dining as well as transportation and/or highways or major roads.
Don’t go overboard with your first investment in terms of size and price. You have to be able to not only take care of expenses but walk away with a profit.
Invest with others
By buying with a partner or partners, you can make the seemly impossible dream of investing come true. That 25% down payment can be split into two or more which will make it easier to move forward with a purchase, however, choose your partners wisely. You have to be comfortable with not only the partners but the agreements that you all have on the purchase price, updates, and management of the property.
Consider small banks
Big banks are typically less flexible than smaller banks. Smaller banks may consider a lower down payment and not have as many hoops to jump through in order to obtain a mortgage. Stop by a small local bank and shop around. You could also contact a mortgage broker instead. Mortgage brokers are intermediaries who bring mortgage borrowers and mortgage lenders together and typically have access to a vast array of banks and mortgage options.
Consider seller financing
If getting a traditional loan is a bit difficult for you then requesting seller financing can be an option. These types of terms are often for a short period of time, about a five year term, with a balloon payment at the end which can be refinanced before the end of the term. These arrangements are risky and can backfire so use caution.
Consider buying a multifamily and living in a unit
This strategy is the easiest way to purchase an investment property. By living in a unit and renting out the other unit(s), the property isn’t considered an investment by the banks and if it is your first home purchase, you can reap the first-time home buyer benefits. You can also take advantage of FHA loans which allows you to purchase up to a four family (foreplex) home with a down payment of 3.5%.
Consider a REIT
Actually having a physical property isn’t the only way to get into real estate investing. If all of this seems way too much for you, consider a real estate investment trust. REITs are companies that can be public or private. They use investors’ money to purchase actual real estate. REITs sell on the major stock market exchanges just like any other stock, ETF, bond, or Index. In order to purchase REITs, just create a brokerage account with company’s such as Vanguard, E-Trade, or Robinhood, and buy some shares. I currently own a few of the Vanguard Real Estate ETF, (ticker: VNQ) which costs about $74.36 at the time of this writing.
Whatever you decide to do, be sure to educate yourself! Jumping into the real estate investment world is an amazing adventure however, it can bring some major headaches along the way if you are not prepared.
Have something to add or a question to ask? Please feel free to do so in the comments.