Real estate investing may seem like a lofty dream, but you might be closer than you think. Real estate investing does not have to be a huge portfolio.
The first time you buy an investment property, it can be a daunting experience.
There are some general tips that you can use regardless of your budget.
Decide Your Goal
Knowing your goals is the first step to buying your first real estate property.
Are you looking for passive income or capital quickly? Both are valid goals, but only one is right for you. Even the best real estate agent won’t be able help you find the perfect property until you know what you want.
Rent should cover your mortgage and other expenses.
But are you a good landlord? How handy are YOU? You need to consider the cost of maintenance and repairs if you are not handy.
You should also pay off any personal debts before investing in real estate. You need to pay off student loans, credit card debt, and medical bills before you can be a realistic real estate investor. You need to give yourself some breathing room financially.
It’s important to understand the risks involved in your goals.
You may have to pay bills even if your real estate investment is vacant for longer than expected.
You could also be hit with unexpectedly large maintenance bills. You might have to replace your air conditioner or install a new roof.
Plan for what you will do if your tenant stops paying rent. You may not be able to get back the months of rent that you haven’t received.
In this guide, we’re mainly talking about investing in rental properties. However, buying a property to flip comes with its own challenges. It’s almost never the case that you will have to pay more for the work you do on a flip than you expected. You may also find that the home stays on the market much longer than expected, which will result in higher costs.
Save a Down Payment
If you plan to buy a property as an investment, you will need to put more money down than if you were purchasing a primary residence.
Renting a property means you’ll need to put down at least 20%, and mortgage insurance won’t be an option.
You should also have two other financial goals in mind while you are saving for your down payment. First, you should build up your cash reserves for when things don’t go as planned. You should also work to improve your credit score, as you will need to have a high score to qualify for a mortgage.
The Mortgage Process for an Investment Property
Calculate your monthly payment and rates if you are buying a property to invest in rather than as a primary residence. You can then get preapproved so you know exactly how much you can spend.
It is advantageous to work with a home-loan expert who has experience with investment properties, as the rules are different than those for buying a primary residence.
One of the most common mistakes made by new investors is not securing funding before searching for a property.
Preapproval will allow you to move quickly when you find the property you are looking for. You won’t be disappointed if you discover that you do not qualify for enough funding to purchase it.
If you are buying a rental, you will need to provide two years’ worth of tax returns, your W-2s for the past two years, and two months’ worth of bank statements. They will also verify your assets.
A lender will want to make sure you have six months’ worth of mortgage payments saved up in case you encounter any unexpected problems.
You need to be prepared and do your research. If you are not prepared, investing in property can lead to financial disasters.