Investing in real estate can be an excellent way to build long-term profit, as long as you follow the right steps. While investing in the right properties can be fruitful, but there’s a lot to consider before you start building your real estate empire.
If you’re debating on whether or not you’d like to become a savvy real estate investor, here’s everything you’ll want to complete or be prepared for, first.
The Real Estate Investor’s Checklist:
1. Pay Down Debt
If you’re going to invest in real estate properties, you’ll want to pay down as much debt as possible first. It’s not smart to go into real estate investing if you’re carrying a large amount of debt from student loans, credit cards, or medical bills. You’ll want to make sure you can manage your mortgage payments if you have multiple vacancies or your property doesn’t sell right away, so eliminating your debt is a wise first step.
2. Save for a Large Down Payment
When you’re applying for financing for a primary residence, your down payment could be as little as 3.5% of the asking price. However, financing for investment properties is a little different, because mortgage insurance isn’t available and there are stricter application requirements.
In order to finance an investment property, you’ll need to come up with at least a 20% down payment, and if you want a better rate, having more than 20% is ideal.
3. Estimate Expenses
As a landlord, you’ll need to pay for expenses like maintenance, insurance, property taxes, pest control, and lawn care, for starters. You’ll want to have a solid estimate of how much these expenses will run you for the property you have your eye on before pulling the trigger.
4. Shop Around for Mortgage Rates
Your investment property financing will likely carry a higher interest rate than your residence, by default. Be prepared to pay a higher rate, but don’t take the first offer that comes your way. You’ll want to explore all of your financing options until you feel confident that you can safely afford your monthly payment.
5. Prepare to Get Handy
Investment properties require a lot of upkeep. If you’re purchasing a single-family home or split-level property, you’ll likely want to save money by tackling most repairs yourself. Be prepared to spend a lot of time fixing toilets, repairing drywall, and checking garbage disposals. While you could hire a handyman, that cost will eat away at your profit, so it’s recommended that you take care of smaller repairs within your skill set.
If you invest in a larger apartment complex or will be purchasing multiple properties, then it might make sense to hire a property management team or a full-time handyman for assistance.
6. Start Small
Even if you dream of owning a large apartment complex, starting small is the best way to get used to being a landlord. You’ll learn a lot with your first investment property and you’ll quickly find out whether you enjoy managing real estate investments. Plus, starting small means you’ll be at a lower risk and that your expenses will be more affordable.
7. Be Wary of Fixer-Uppers
Fixer-uppers are on the market for a reason. Many times, investors lose money on these properties, because the cost of rehabbing the home eats into too much of their profit. If you are set on a fixer-upper, be sure to do your homework. Even if an investment looks like a steal, you’ll want to work with a trustworthy contractor to estimate the cost of all repairs before bidding on the property.
8. Consider REITs
If being a landlord sounds like too much work for you right now, there are other, more passive forms of investment to help you start to build your real estate portfolio. REITs, or real estate investment trusts, allow investors to help fund commercial real estate projects for public or private companies. First-time investors are often advised to only work with public companies, as there’s generally less risk involved.
9. Location, Location, Location
Your modern bungalow might be a renter’s dream, but if it’s in the wrong neighborhood, your investment won’t yield the ROI you’ve been expecting. Finding the right location to attract good tenants is important for every beginning investor. Look for areas where property taxes are low, school districts are good, the job market is high, and attractions and amenities (restaurants, stores, parks, etc) can be found nearby.
10. Partner With a Top Agent
Once you’ve decided to pull the trigger and move on your first investment property, talking to an agent with experience in investing will ensure the buying process is as smooth as possible. Real estate agents can also offer advice on the local market and the best neighborhoods for investment purchases.
Clever can help you find your first investment property by matching you with an experienced local real estate agent.