Property Investing For Beginners
Rental properties can be a great source of wealth creation but unlike many other investment options it can be difficult to get in to. The costs involved to enter the sector are much higher than the start-up costs of other investment sectors. For someone looking to purchase their first rental property finding investment property loans can be a daunting task. Getting a loan to purchase an investment property is usually a bit harder than getting qualified to buy your first home. The requirements for investments properties are more stringent than those of a standard home loan
You can become qualified for a standard home loan without even having a deposit in some situations while most lenders for an investment loan require a minimum of a 15% down payment. That means you should have at least a 15% deposit saved before you even bother to look for a property.
While there are many options when it comes to finding the finances to buy an investment property, the four main options are:
- Mortgage broker
- Private Lender
- Federal Housing Association (FHA)
No matter which lenders you choose to approach they will all want more than just a down payment to give them the confidence to give you the loan, they also need to know that the property will be profitable. This doesn’t mean they just want to know if the rent will cover the cost of the monthly mortgage repayments, they want assurances that your investment will be profitable in the long term, that you will not default on your repayments. For this the lenders will need to know that the potential return in rent will easily cover the cost of the mortgage, of insurance, of taxes and of you maintaining the property.
There are various loan options available to fund your property:
Residential loan—this is your standard home loan. Most people wrongly think that a standard home loan allows you to purchase a single dwelling for which you are to occupy. In fact a standard loan lets you buy anything from a single dwelling to a four-plex complex. To qualify however you will still need to be an owner occupier of one of the dwellings. It is important to note however, you do not have to live in the dwelling for the life of the loan, you can move out anytime you like and rent that dwelling too. But you must live in the property when you first purchase it.
If you don’t want to live next door to your tenants or would rather purchase a property with more than four dwellings than you will need a commercial loan. Commercial loans are much more expensive than a residential loan with minimum down payments beginning at around 25%–35%. On top of this interest rates and charges are normally more expensive for the commercial loan. A lender for a commercial loan will examine the property more thoroughly than would happen with a standard loan. Without the guarantee that you will reside in the property the lender has to accept the possibility that all the dwelling within the property could be vacant. The lenders will not only make sure that the property will have the required cash flow to cover the mortgage and typical expenses related to rental properties but they will also want to see that there will be enough remaining to be put into a reserve account.
FHA programs are available for investors looking to purchase their property with a residential loan. FHA do not actually loan money to people, instead they offer insurance to the lenders to make it easier for you to be accepted for your loan.
These are the two method of getting finance I would recommend. But if you have had credit problems in the past and cannot obtain a loan through traditional means then you may have to look elsewhere for financing.
One option is to get a private party loan, which is where you get a loan not from a bank or broker but from an individual or private business. With this type of loan you actually work out the terms of the loan together. While these loans can end up being a win win situation for both parties—it’s not unheard of for private party loans to come with lower interest rates than the big banks—there is a lot less regulation and more opportunity for fraud. One option for you to get a private party loan is to ask the current property owner to take on the loan for a reasonable down payment and a good interest rate.
The most risky option I will mention is the hard money loan. A hard money loan is an asset based loan in which you secure the funding with other real estate you own, including the property where you live. Again these types of loans are not available from the banks or brokers, they are only available from private investors. Typically the amount of the loan will be about 65%-70% of the value of the property you use for assurance and traditionally come with very high interest rates.
Again I would not recommend the last two options for purchasing your investment properties but if getting traditional finance is not possible then may be your only option to enter the market.
While finding investment property loans can be difficult and expensive at the beginning keep in mind that a little further down the track you will be able to refinance your loan, giving you both a better interest rate and better terms.
Finding Your First Investment Property
Finding the right investment property takes time and research, but it is essential to succeeding in the property market, unfortunately finding your first investment property is often harder than most investors think. Eagar to buy a property, to start reaping the rewards, inexperienced investors often jump head on into the first property they find and for many of them this error can cost them dearly. This article will outline some of the things you need to know to find the right property that will generate income and not waste it.
You have the choice of searching for a property by yourself or with the aid of a broker. My advice to first time investors is to invest a little money and get a broker to guide you through the first purchase, if your plan is to buy multiple properties than I recommend you use a broker to help with all your properties until you feel confident about going it alone. If you’re looking to buy into a market that you don’t know well than a broker from that area can help you find suitable properties including new properties that have just been put up for sale, giving you the first bite. A broker with local knowledge, who understands the area that you are looking to invest in, is invaluable for both the beginner and the experienced buyer.
Understanding the local market is paramount to your success. Look for any discernible trends in that local property market. If housing prices are falling then there is a good change that the local rental rates will soon follow. Along the same lines, if the local prices have gone up in the past 6 months than the area must be in demand, meaning you will be able to increase the rent without fearing long term vacancies. If your target market is not too far away you should also visit city hall or at least visit their website to see if there are any development or plans for that area which could adversely affect property prices. It is also a good idea to contact the local police department to check the how safe the area is so you can find out if you should provide extra security to the property.
Once you have found your perfect property you need to make sure you have your finances in order. Before you start looking for financing you should check your credit report so you can find any inaccuracies that would prevent banks from loaning you money. Checking this yourself will give you time to rectify your record before letting the banks have a look. It’s best to check with all the credit reporting bureaus to get the full picture of your credit situation. Even if your report doesn’t seem that bad remember that the better you can make your credit report the better the interest rate you will be able to get.
While a renovator’s delight can be an exciting purchase I don’t recommend it for the first time investor. Although it means buying the property at a cost well below anything else you will find in the area the cost of fixing the property to a stage where you can successfully rent it out can very quickly break the bank, and of course the period that the property is being worked on is time that you can’t collect rent. Your first property should be one that is ready to be occupied, one that can start making money as quickly as possible.
You should of course inspect the property yourself and make sure it is too your liking but more importantly than that is to get a professional to inspect the property to make sure it is safe. While you can check the doors, the power points, the taps and the gas yourself, it definitely pays to get someone to look below the surface, beyond what you can see. Have a professional check the actual wiring throughout the house, see if there are any remnants of lead paint on the property and make sure that the building is structurally sound, you don’t want your first property to fall down around you.
I know that when you make the decision to invest in property you are so anxious to buy that you don’t want to go waste time and effort worrying about the property, you want to buy a property and start making money. But when it come to finding your first investment property it really does pay to take your time and double check everything before proceeding with the purchase, not only will it save you money and make it a more enjoyable experience but it will also give you the confidence to continue to invest in further properties down the road.
Thinking of Buying Investment Properties
Buying investment properties has been proven over a long period of time to be an excellent source of additional income and also as an asset whose value increases each year. When you decide to retire selling these properties is better than money in the bank. Most people who have never invested in property see renting as an easy process: buy the house and sit back as the each week the rent pours into your bank account uninterrupted. Sadly there is a lot more to investing than that. For most first time investors their biggest fear is not the process of owning a rental property buy rather being able to find the financier to fund the first property. Quite often however this is a lot easier than they would think. What you need to consider when you buy your first investment property is what are the issues and costs involved in renting a property.
A simple mistake made by investors entering the property market is to assume that the mortgage repayments that will be owed on the new property will be easily covered by the rent paid. Buying a rental property without first researching to see if the rent will cover your mortgage repayments is the first step to disaster. As with any investment the first step is to research, research and research again. You should decide on the area you want to buy the property and then check the local real estate agents to see what they are charging for rent and the types of properties they are renting. Take note of the type of property and the features, such as number of bedroom, bathrooms, renovated kitchen and keep these at the forefront of your mind when looking for a property to purchase. It is also a good idea to contact the area’s local landlord’s association to find more information about rental rates.
A potentially big hidden problem owners can face is not having an emergency fund for the property. This fund is needed for the repair and upkeep of the property, and more worryingly can be needed to pay the mortgage during periods where the property is vacant. Ideally you will have money set aside to pay the mortgage for a few months before you purchase the property. You need to keep this in mind when you are looking at potential properties and how much you can charge for them, will the rent paid cover the mortgage, the cost of insurance, taxes and ongoing maintenance to the property?
It is also important to imagine your perfect tenant, not just one who pays their rent on time but also ones who will be respectful to the property, the neighbours and the local community. For example a small home might attract a young family and although you may expect that they will pay the rent on time they do have children and possibly pets which would be more likely to damage the property than a young couple in a upmarket apartment complex.
Also the facilities in that community can also dictate the type of clients you can expect to get. If there is a University or College nearby there is a good chance that the property will be rented to students. Buying in a community with a large number of students almost guarantees that your property will rarely be vacant but also means maintenance costs could skyrocket.
If you haven’t been scared away from investing after reading all that then renting could be the investment for you. Once you understand and accept some of the financial issues involved in the rental market it is time to look at the law, in particular what are the rights and responsibilities of being a landlord. Each state has its own set of laws pertaining to this so it’s definitely outside the scope of this article but understanding your responsibilities can save you a lot of money and maybe even jail time.
Renting properties can be a great way to secure your financial future but it is full of potholes waiting to catch the unsuspecting investor. Before you invest you must do your homework, understand all of the financial and legal considerations before signing off on your first property. Before you buy your first property go out and talk to local landlord associations, talk to your local real estate agents and tell them I’m thinking of buying a rental property, what do I need to know?
If you are still eager to get involved with buying investment properties, I congratulate you and welcome you to the wonderful world of property investment.