It’s tempting to think investing in real estate will make you an overnight millionaire. But as with any investment, understanding the space is crucial before you pour your savings into it. From having a good sense of your credit standing to making sure being a landlord is something you’re mentally prepared to handle, there are several steps to take before you can become a real estate tycoon.
In this article, we’ll provide a helpful overview of what you need to know before you invest in your first property. Remember, not only will you need to understand fully what you’re buying in terms of the property’s risks and uses, you will need to have a clear sense of the financing needed to pull off the feat. For those who yearn to diversify their investments beyond stocks and bonds, here’s what you need to know.
Knowing Your Credit Profile
First, you’ll want to take a look at your credit profile so you can get an idea of where your credit stands, as well as identify any mistakes you need to dispute or other items you need to address. You can get free copies of your credit reports from the three main credit bureaus — Experian, Equifax and TransUnion — by visiting AnnualCreditReport.com. Knowing this information will give you an idea of what terms and conditions you may qualify for on a loan and if you’ll need to do anything to improve your credit before you apply.
Once you review your credit reports, it’s a good idea to consult with an expert before you take action on any items, like paying off collection accounts or closing old accounts. While you may do these things with the best of intentions, they may not always have positive effects, and you want those scores as high as possible before you apply for a loan.
If you are not eligible for a loan based on your credit or other qualifications, all is not lost. If you have the time, you can hold off while you take steps to improve your credit, like paying down debts or disputing errors, as we mentioned before.
If you’ve already found the property you want, you may consider looking for an investor partner to go in on the deal. There are many others out there wishing they owned more real estate who lack the time and/or expertise to find and buy property.
Deciding What to Buy
Now that you have an understanding of your credit and what you may qualify for, it’s time to narrow down what types of investment properties you’re interested in. All things being equal, second homes may offer better financing, but it will depend on where the property is located and what you intend to do with it. It’s a good idea to talk with your tax advisor about how you plan to use the property to decide whether it would be better to buy a second home or an investment property. Be aware that it’s important to be upfront with what the property will be used for and not to falsify information, as this can get you into legal trouble.
Understanding the Numbers
Investors have different goals. Some want to buy a rehab property, fix it up and sell it quickly for a big profit. Others specialize in pre-construction, which means they put a contract on a home or condo in a development before it is built and then sell it for a profit, sometimes before they complete the purchase. Others will buy a home they can rent out and are happy to break even or make a little money each month, expecting appreciation to be the payoff. Or perhaps they’re buying a vacation home in an area they visit often. They may use it from time to time and rent it out the rest of the year for a profit.
Whichever approach you decide to take, make sure you understand the numbers, including the cost of financing, a down payment, advisor fees, repairs, etc. Be realistic about whether you can afford to make the mortgage payments for as long as it may take to find a buyer or a tenant.