Watch 30 minutes of HGTV and you’re an expert right? Perhaps, but highly unlikely. While you might have great taste for breakfast bars and appreciate the appeal of soft linen colored walls, getting started in real estate investing often takes a little more than “TV learning”. The extra preparation work is rewarding because real estate provides a tangible asset that often appreciates in value and is universally regarded as a safe investment. However, while house flipping shows do a good job of displaying the potential that real estate investments can provide if done well, it is of paramount importance to understand the full picture of ownership in investment property.
Luckily, what follows is a quick guide to separating yourself from the pack. No more “what ifs” to ponder. No more shows of House Hunters to contemplate. With a little work, the transformation from a passive commentator to a real estate insider starts here. You can thank me later.
Step 1: Take a Look in the mirror
Take a step back and evaluate yourself. As with many things in life, it is important to set goals and be very cognizant of exactly what you are looking for before going out and making a significant purchase or commitment. It is just as important to begin by looking at where you are now and assess your current finances. In many cases, starting with a sizeable amount to purchase an investment property limits the risk of taking too big of a loan. In fact, many investors wait until they can purchase the property in full to avoid being responsible for multiple loans. Another rule of thumb is to possess at least 20% of the price of the home before seeking out a loan. Whatever your approach, be honest with what you can afford and take the proper next steps in achieving your short and long-term goals.
Step 2: Take a look around
Over the past couple of decades, real estate has become an increasingly common investment vehicle. However, housing climate and investment timing, just as with any investment, plays a huge role into determining a good purchase from a bad one. If you are currently reading this article, it probably means that you are somewhat interested in today’s housing climate—which is a relatively healthy one. With the recession behind us and affordable prices and interest rates becoming available, there is a steady demand for rental properties. Additionally, trends among the younger generation of millennials show that they are less inclined to lock down a 30-year mortgage on a house and more inclined to live in rental units. Differing from previous generations, they value freedom, flexibility, and mobility due to the global world they find themselves in. But what does this mean for investors? It is a greater opportunity to profit from a sustained flow of rental property demand. Single Family Rentals (SFR) provide a means to bridge the gap in this regard, which allows the tenant the same benefits of living in a home (as opposed to an apartment/condo/townhome) without the rigidness of a home mortgage. As an investor, the SFR space is a lucrative niche in the market—one that investors of all different tactics can relate to–including seasoned investors who are looking to grow a portfolio of rental properties.
Step 3: Plan Accordingly
In other words; don’t get lazy. The goal is to make money, so you should double triple check that the numbers check out. It is important to remember that not every real estate investment is a good investment, and you should gather as much knowledge as you possibly can to make the best informed decision. The obvious talking point here is about cash flow.
Simply put, you need to project how much money you will be making after all expenses and costs are considered. First, get a good gauge on projected estimated income. While not always 100% accurate, you can get a good feel for how much you can charge in a certain area simply by doing research on other properties in the area. Research size, number of bedrooms, number of baths, and so forth to come up with a comparable rate to estimate projected income.
Then, be sure to account for all the expenses and costs that go into buying and maintaining a property. In addition to the initial purchase price, there are also many transaction costs. Required insurance, taxes, and regulations such as fair housing rental regulations, building codes, and safety guidelines must also be followed. Lastly, expenses such as property management and repair costs, utilities, landscaping, rehab costs, homeowners’ association costs, and even a budget for future repairs and maintenance (CapEx) should all be taken into account.
Things to Consider
It is important to remember that not every property is a good investment. Other things to note:
- Don’t fall into the trap of projecting with inflated numbers, so use conservative numbers. Consider giving yourself a little bit of a financial cushion in order to account for the unexpected.
- Invest in what you know; being an expert on your area (MSA) and knowing the ins and outs of your market goes a long way and gives you an insider edge over the competition.
- Seek out relationships and conversation with those with more knowledge and learn from them. It is often these simple (and seemingly obvious) tips that get overlooked, and would have made a tremendous difference.
While getting started in Real Estate Investing may seem daunting, there’s no reason to sit and watch from the sidelines. After reading this article you are now knowledgeable on a broad overview of real estate investing and are ready to take on the mindset of a successful investor! But don’t stop here; get moving, start planning, and do your research. The result could be new means for passive income, establishing a retirement plan, or simply a sparked passion for Real Estate.
The key to getting started in real estate investing is not so much the lack of information or resources, but rather getting up and taking the tangible steps to accomplish your goals. One acquisition is great, but don’t stop there.
CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions.