Investing in real estate is the most tried and true form of wealth building in the world. The expression goes “they are not making any more land“ and those who invest in real estate have traditionally realized profits time and again. If you are considering investing in real estate, there are certain foundational elements that are followed by the most successful investors. Follow these steps and you will see that your investments will be sound and profitable every time.
Consult with an experienced real estate agent
When you are venturing into a particular real estate market, consulting with an experienced real estate agent is a must. These agents not only know the current market but they have a very good feel for the history of the neighborhood and the direction it is going. For example, experienced realtors will be able to tell you where the next shopping centers, schools, and other places of interest that increase the value of a property are being considered by the township and local developers. This is something you would never know on your own. Experienced realtors also know the history of neighborhoods and are able to tell you if any of the neighboring properties had issues with crime, pollution or things of that nature. This information is critical when you are investing since the stigma of a neighborhood can absolutely kill the value of your property. Conversely, the feeling that a certain neighborhood is “on the rise” can cause your property to increase in value exponentially.
Experienced real estate agents also have connections with investors and property owners that may not have listed their homes for sale on the active real estate market. These “off market” deals are often advantageous to the buyer. Take advantage of this kind of inventory and talk to your realtor about short sales, sheriff sales, foreclosed properties and off-market deals.
Develop your credit
Unless you are purchasing in cash, you will need to apply for a mortgage. At the time of a mortgage application, the most important factor is your credit. Lenders will determine your eligibility for a mortgage based upon your credit score. If you have open and unpaid bills you should consult with a credit repair agency to make sure that your credit is at least at 700 or above when you apply for your mortgage. You will notice that credit is the very first question any lender will ask you. Before you even begin interacting with lenders it is important that you make it a point to devote as much time as possible to analyzing and increasing your credit score so that when the time comes lenders look upon you favorably. This will result in an advantageous mortgage interest rate and lenders will actually compete for your business if you have a good enough credit score.
On the back of this approach is the size of your down payment. The more money you can put down the better deal you will get with your mortgage. Conventional mortgages require between 10% and 20% as a deposit. If you are able to put that much down on contract, they will not charge you private mortgage insurance. Private mortgage insurance is paid to the lender when a minimal down payment is placed into escrow. FHA loans require only 3.5% down but private mortgage insurance is required since there is no equity in the home in the event the lender needs To foreclose. This private mortgage insurance protects the lender against such a circumstance. If you have between 10% and 20% down on contract and a good credit score, the lender will give you a favorable rate and will not require private mortgage insurance.
Investing in multi-family properties first
The mistake that many people make is that they believe they should buy their dream house first and then begin investing in real estate in multi family properties. This does work of course but there is a better way to approach real estate investing.
Something to consider is what is known as the 4-3-2-1 paradigm. Using this approach, investors first purchase a four-family home. Once they have secured that home and begin to rent it out, they will accumulate some income and then purchase a three family home. They will repeat the process until they have three separate rent-producing properties and only then will they purchase the “dream home“. This is a very wise approach and should be considered from the outset since rental income is the key to accumulating wealth.
Single-family homes versus condominiums
Purchasing a single-family home (most of the time) means the home you are buying is detached on either side. The home will typically not be subject to a homeowners’ association and the common areas will be your responsibility to maintain. This means you will need to shovel snow, pay for your own garbage removal and make sure that the landscaping is properly maintained.
Purchasing a condominium is different. Condominiums are buildings where you will be connected on either side to adjoining homeowners. There will be common areas such as walkways and hallways that will be maintained by the homeowners’ association. There will be a monthly maintenance fee that you will pay directly to the homeowners’ association. If you do not make those payments, a lien will be placed against your unit and it can be foreclosed upon by the homeowners’ association. There are also bylaws in homeowners’ associations which you must abide by. If you do not, they can force you to sell your unit and move out.
Condominiums do not cost-typically-as much as single-family homes. There are benefits and drawbacks to each. If you are considering purchasing a condominium, obtain a copy of the bylaws and read them thoroughly since you need to know what is allowable and what is not. Your lifestyle may not suit the condominium and vice versa. You need to do your research and also request a copy of the condominium financials. The reason for this is that your lender will require a copy of these financials to determine if the condominium is credit worthy. If a large number of the units are not owner-occupied and if the budget is upside down, the lender will deny your mortgage based upon the fact that the condominium is not a good investment in their eyes.
These are not factors when purchasing a single-family home.
Have a realistic budget and stick to it
Many homeowners fall in love with certain properties that are above their price range. This starts them off on the wrong foot right away. Purchasing a property you cannot afford is a major mistake. Be conservative with your first purchase. Be mindful of the fact that missing payments will have a ripple effect on your credit and your ability to continue investing in property. Being late on your mortgage will be reported to the credit bureaus and that will impact your credit-worthiness and a lender’s willingness to loan you money in the future.
Locate neighborhoods with reasonable prices and try to find properties that are below market value. Do not aim high for the multi-million dollar properties right off the bat. For your first investment, purchase something moderately priced that you can spruce up and rehabilitate and turn around for a quick profit. In the alternative, find a multi-family property that you can rent out and go from there. If you take on too much at the outset, it may turn you sour to the real estate industry before you even get started.
Consult with and retain an experienced real estate attorney
Consulting with and retaining an experienced real estate attorney is worth its weight in gold. Attorneys have seen the twists and turns real estate transactions can take and are equipped to help you navigate through those circumstances as they arise. If you are equipped with an experienced realtor and attorney, you can move forward with the confidence that you have the support you need to succeed in real estate. Have your lawyer review your contract and then, once the contract is executed, take the following steps: have a home inspection performed, apply for your mortgage with good faith and diligence, have the lender conduct an appraisal, have your lawyer order a title report, order a survey and schedule the closing once your loan has been approved.
Having a home inspection at the outset of the transaction should be mandatory. You want to check for conditions on the property that the seller should be responsible to remediate such as termites, carpenter ants, other wood destroying insects, lead paint, structural defects, mold, asbestos and damage to the systems such as the hot water heater furnace, HVAC system and roof. You can use these items to negotiate with the seller to reduce the price since they are all conditions the seller will encounter with subsequent buyers. Your attorney and realtor can make the argument that you are interested in the home and would like to negotiate the price down since the home inspection revealed conditions the seller should address prior to closing.
Equipped with the aforementioned, you will realize success in the real estate market. Be sure to research both the people and properties you are interested in thoroughly before you make any decisions. Always try to find property at the lowest possible value and capitalize on rental income when possible. Try to avoid buying the dream home until you have secured at least one or two rent-producing properties. Keep your credit score high and force the lenders to compete for your business. Finally, “never fall in love with a piece of real estate”. A very wise investor once said “make your offer and walk away”. This is advice to live by.