Building equity in real estate is a smart move. Starting early gives you the time you need to build wealth, recover from market plunges and still come out on top. What you need is a strong investment plan and a dream team to help you execute efficiently. Study the real estate market, prepare well in advance and avoid investment pitfalls that others have made before you.
How to Invest in Properties
Set your investment goals. Know how much can you afford to spend per month on your investment while keeping enough money in reserve in case problems arise.
Consult with professionals. Obtain sound advice from your financial advisor, tax accountant or lawyer and let them know you’re thinking about investing in real estate. Your advisors can help refine your investment strategies and possibly recommend types of real estate that are best for your financial situation.
Form your team of experts. A team of knowledgeable professionals reduces investment risk and helps you avoid investment pitfalls. A real estate broker, lender, lawyer, property inspector, escrow company, handyman and certified plumbers and electricians comprise your team. To find these professionals, just ask the experts you already work with for recommendations.
Research lender requirements for investment properties. Expect to put down an average of 20 percent to 30 percent to get a mortgage for investment property. Fannie Mae and Freddie Mac offers investment property loans (see Resources). Most conventional lenders will ask for 20 percent down but will give you a better interest rate if you can provide a larger down payment.
Find property that meets your goal criteria. Your real estate agent can provide you with information on unemployment, schools, rent prices and any market information specific to the property. On paper, a property may look like a terrific deal based on list price but if it can’t be rented or the property sits in a declining market, you may be stuck until the local market recovers.
Perform due diligence on the property. Analyze monthly costs to maintain the property (mortgage, insurance, taxes, association dues, lease fees, property management costs and cost of ongoing repairs), check cash flow and return on investment. Take into account sales prices of other properties in the area, any income the property makes, costs for initial repairs, how you plan to make money from the property, market rents, market prices, any problems with title and the age of the property. Use a certified home inspector that checks the plumbing, electrical, heating/cooling systems and the structural integrity.
Figure out your exit strategy. Some of these include investment strategies, such as buy and hold, property flipping and delivering different amounts of profit at different time frames. Pick one that meets your investment goals and estimate your profits. Have an alternate exit strategy in case the unexpected comes up.
Submit an offer and begin negotiations. Your real estate agent gets paid to negotiate for the best price with sellers. If there are any property repairs that need to be made, is the seller willing to pay for costs or offer a discount on the price of the home? What contractual terms allow you to get out of buying the property and still recover your earnest money deposit?
Go to closing. Take possession of the property and come prepared with any down payments money you need to provide.
- Study real estate investments first before taking the plunge and buying your first investment property.
- Understand the financial impacts of owning investment property.
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