How to Invest in Real Estate Part 1: How to get started with Real Estate Investing: Welcome to my Real estate Investing series: How to Buy Investment Property. Real estate investing can be incredibly lucrative and an excellent way to build wealth. Given the size and scope of the subject, real estate has something for everyone with multiple niches to explore. Some people may envy the house flippers on HGTV and want to try their hand at flipping houses. Other people may want the steady income that being a landlord can bring you. Either way, those dreams will stay dreams unless you get started! These steps below will show you how to get started with real estate investing:
Step 1: Financing – How to pre-qualify for a Home Mortgage
The first logical step if you’re going to ask how to invest in real estate is to look at financing. Unless you are one of the lucky few who can buy a house completely with cash, you’re going to need a mortgage.
However, before jumping in and calling every mortgage broker under the sun, see if you pre-qualify. Nerd wallet provides a great mortgage prequalification calculator here. If you find that you don’t qualify – it’s okay!
Find out the reason why and work on that specific item. If your income is too low, work to improve your income with a second job/side hustle/job. This can help you build your annual income. Here are some tips to increase your income to improve your chances of prequalification for a loan. If you’re not prequalifying because of a credit issue, work to improve your credit. Here are some tips on how to improve your credit score. If you find that your credit score needs some work, take a look at: Credit Repair Resources.
Finding a lender
If you pre-qualify – that’s awesome. Now you need to find a lender. Mortgage brokers can be helpful in navigating the world of mortgages and lending. But with almost all mortgage brokers, they sell their loans to Fannie Mae and/or Freddie Mac which are federally owned mortgage assocations. This means they have very strict guidelines for lending rates, amounts and terms. If your situation doesn’t fit into their box – you are out of luck!
What I recommend is trying to find a portfolio lender. These lenders do not sell their loans to anyone. Everything is kept in-house, which is great for you and them. Portfolio lenders typically have more flexible terms and qualifications – which can only benefit you the investor. One portfolio lender I have used in the past is Carrington Mortgage.
Find and Compare Loans from multiple sources to get the best fit for your needs.
Step 2: What property to invest in? How to choose your niche.
Now that we have financing out of the way, it’s time to figure out what property to invest in. Real estate is full of options. Where you decide to go depends on your goals. Buy and hold real estate can provide a nice, steady income. Conversely, taking on a fix and flip project can net a considerable amount of money in a short span of time. Your goals will dictate your search.
Consider these avenues for the buy and hold real estate crowd:
Option 1: Buy and hold investing with single family homes/condominiums:
Here are some Pros for buy and hold investing with a single family home
- Easier to start
- Lots of options
- Renters will typically stay longer
Here are some Cons:
- Repairs – once you have several of these, you have multiple roofs, ACs, heaters and appliances to worry about. If several properties have repair issues at one time, that can mean serious money!
- Harder to grow – It becomes difficult to scale up your business once you have several single family home rentals. Mortgage companies may begin to limit the amount of loans you can receive or make the terms stricter.
- HOAs – Watch out for Home owner association fees! The association can decide to raise the payment rate or add a special assessment (This can add up quickly!). Be very careful!
Option 2: Buy and hold investing with multi-family properties:
Multi-family homes containing 2-4 units can be purchased with a residential loan. Multi-family properties larger than 4 units need to be purchased with a commercial loan.
Here are some Pros for multi-family investing:
- Repair costs – Your repair cost will be lower because all units are under one roof. For a duplex (a two apartment house), you have one shared roof and appliances. This makes long term maintenance easier.
- More rental income – typically a multi-family property will generate more income than a single family. This is good news for you as a landlord.
- The option to “live for free” – One avenue people use when they get started is the idea of “house hacking”. This means buying the property, moving in and renting the other unit(s). When done propery – you could “live for free” aka no mortgage payment. When done extremely well, you could even get paid to live there (and live for free!).
Here are some Cons for multi-family investing.
- Harder to find – Multi-family properties just aren’t as common as single family properties. This means the overall pool to find them is smaller, which limits your options
- They’re old – Most multi-family properties are older. You may encounter deferred maintenance, obsolete/unsafe building materials (i.e asbestos, lead paint), or issues with wiring (old knob and tube wiring is infamous for catching fire)
- Owned by other investors – Most multi-family properties are owned by other investors, not by people living there. This means they’re in the game to make money, just like you. This lowers your chances to finding a “great” deal.
- Pricing – Multi-family properties are HARD to value properly. This means that the property is most likely going to be overvalued. Combine an overpriced value with some expensive repairs, and you have a money pit instead of an investment.
For the house flipping crowd here are some Pros/Cons:
- Fast money – Done properly, you make serious money after the property sells.
- No long term commitment – Once your property sells, the deal is done. There are no tenants or unforeseen repairs to worry about once settlement is finalized.
- More moving pieces – There is plenty that can go sideways if something unforeseen happens or projected numbers aren’t right. Be aware.
- It’s expensive – Factor into this: purchasing the property, rehab costs, permits, inspections, realtor commissions, interest on lended money and holding. Not to mention, you will be taxed at a higher rate because most flips are held for less than one year. This means that you don’t qualify for capital gains tax (at 15%). Instead, you are taxed at your usual rate.
This is just a quick overview, there are other types of properties out there that could be invested in. Now that we have financing and a niche to focus on – we move to the next stage: How to analyze deals.
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