Getting started in real estate investing can be a lucrative venture for many individuals. However, there are a lot of things to think about when preparing to buy your investment property. Several financial factors related to real estate investment should not be ignored, from upfront costs to expected earnings to planning an emergency fund.
It’s recommended to start your research and planning as early as possible. Getting a head start means you will be able to find the best quality property for your first investment. On top of that, it allows you to know if you’re truly ready to begin taking on the challenges that can come with investing in real estate.
Read on for the first financial preparations you should take before investing in real estate.
Determine Cost and Return
Once this step is complete, start determining what you’re going to be expecting in terms of upfront costs and calculate your return on investment. This may require researching a few different topics. To begin the process, determine the average cost of the property you’re looking for within your preferred buying location. Since real estate investments are purchased with a mortgage, a down payment and monthly payments associated with that mortgage should be finalized. Generally, you’ll want at least 20% saved up at minimum to avoid additional insurance costs.
Next, have a rough estimate of how much you’re expected to earn off of the property. If you want to look into what the average property rents out for in your area or how much a flipped house will sell for, use local websites that share real estate listings to find that information. If you intend to rent it out, your goal should be for your rental income to cover the property’s monthly mortgage and tax costs. To make your investment lucrative, ensure that you’re earning more than the costs of the property.
After you have a general idea of what you’ll be spending and earning each month, meet with your lender to get pre-approved. They will have an accurate picture of their interest rates, along with the down payment you will need to have saved up. Once you have a full picture of how much this will cost you, create a savings plan to help you prepare for the down payment long before you put in a purchase offer.
Start Saving
It’s no surprise that buying an investment property is a very pricey endeavor; therefore, it’s important to develop a savings strategy long before you begin the property buying process. It is essential to prepare for a down payment and prepare for the variety of fees in the purchasing process, such as legal, closing costs, and insurance. Homeowners should expect to pay between 3-5 percent of the home’s purchase price in closing fees.
As for the down payment, for a first-time real estate investor who plans to owner-occupy, you may be able to qualify for an FHA loan at a 3.5% down payment. But if you do not plan to live on your investment property, you will need to save for about 25-30% of the home’s total cost as a down payment. Non-owner occupied investment properties are often riskier, and banks want more money down.
Having separate savings account for real estate investing and personal funds can be a solid strategy. As a real estate investor, you should always have extra funds saved up to cover expenses that you didn’t account for in your monthly budgets, such as home repairs or vacancies. To find the best savings accounts, do your research and dive into the variety of perks that each offer to find the one that fits your needs. There are even financial solutions that allow individuals to utilize an early direct deposit feature. This is especially valuable for rental property owners who may want to get their rent payments ahead of the end of the month so that they’re ready to pay off their mortgage bills.
Get Your Credit in Order
You’ve done most of the grunt work that comes with preparing for real estate investing. One of the most crucial things you can do before purchasing your first property is to check your credit score. To be low risk to lenders, you’ll want a credit score between the good and excellent range (700-850). If you have a higher credit score, you will be eligible for lower interest rates, allowing you to save more on mortgage payments and get a higher ROI. Luckily, checking your credit score is relatively easy and can be done online for free. Some websites allow you to pull a “soft credit check” to see your FICO score without impacting your score.
If your credit score needs some improvement, there are plenty of ways you can do that. Begin by paying down any debt you have. This means that you should be making more than the minimum payment each month. The less debt you carry, the better your credit score is going to look. To make sure that you are limiting your debt, keep track of how often you swipe your credit card, and stop using it as frequently as you usually do. Instead, replace this action with paying for things in cash, as this gives you a more accurate representation of how much you are spending and allows you to watch money leave your pocket.
In some instances, it will require more than just paying down debt to improve your credit score. Minor budgeting adjustments and financial planning will be enough to boost your credit score 50-100 points, but there are some other options available in the case that it doesn’t. For example, credit builder loans are available to help you boost your score. These loans are low interest and low risk, and if payments are made on time, they are a great way to boost your score.
Start Searching for Your Ideal Investment
After completing all of the financial preparation for your investment property, it’s time to start shopping! Your goal should be to find areas that will be the most appealing to renters and buyers—be picky and identify the exact neighborhood you want to invest in and start looking at the local listings. Look for locations close to schools and major metropolitan areas to start, as those are pretty common must-haves for individuals looking for a new property. Finding something within locations like these at a reasonable price will allow you to earn more than an investment property in unsafe neighborhoods far away from major districts.
To make this process as effective as possible, talk to a local real estate agent, preferably one who’s experienced in selling to investors. Not only will they have a better idea of the best neighborhoods for rentals or house flipping, but they are also often given information about houses on the market in advance of when they’re published online and know when the best time to buy is. Make sure you look for a buyer’s agent instead of a seller’s agent, as their goal is to find you the best deal and the best house for you.
Once you have found your ideal investment property, it’s time to put in your purchase offer and start the process of renting out the property or flipping the house! Starting your investment plan early gives you the best chance of saving money and earning more. Make sure to use helpful tools such as the ones available on Rentometer to determine the best pricing for your rental property.
This article was written by the Rentometer Content Team. The Rentometer Blog features fresh takes and insights on rental housing topics, services, and technology. If you liked this article, subscribe to Rentometer’s email newsletter to stay up-to-date on the latest trends in rental housing.