Your First Real Estate Investment Property
The urge to get into Real Estate is STRONG! Everybody knows someone who’s done it, and many want to grab a piece of the pie themselves. Looking past the excitement, however, there can be a decent amount of uncertainty. Where do I buy a property? How much money will I need? Who do I contact? I recently made my first purchase, and I thought it would be useful to outline the process.
How much money do I need to buy a property? This depends largely on two factors: where you want to purchase, and your funds for a down payment. Now if you try hard enough, maybe you’ll find a great low-cost property in a high-end rental market and make a 2% return on the property value every year! That’s great, but let’s ground ourselves a little. Let’s first take a look at a heat map of property values.
The coasts are always going to be on the expensive end, and the further inland you travel, the lower values become. Next, we need to think about what areas people like to rent in – mainly areas that are close to cities, close to transportation, and close to businesses. Once you figure out an area (for a first-timer I’d suggest something close to your primary residence) you’ll have a general idea of how much a property will cost.
Now go out and get Pre-Qualified on a loan! You can do this pretty quickly and easily by contacting your favorite bank or lender. This can happen over the phone or even by filling out an application, online. Careful, each time you do this the bank will run a credit check on you, which can bring your score down temporarily.
However, if you have multiple checks within one month, they’ll all just count as a single credit check. You also want to make sure you’re telling the bank or lender that you’re looking for an investment property, not a primary residence. While this might give you rates that are a bit higher, you’ll avoid running into issues later. You don’t want to say you’re looking for a primary residence and then rent it out as an investment without it being documented. To give you some more options, look into different types of loans such as the low down payment FHA loan to save costs.
So what exactly do you look for in the Pre-Qualification? A couple main points are:
- Is the lender charging you any lender points? (A fee at closing to lower your interest rate)
- What’s the interest rate they offered?
- What the APY on the interest rate? (The accumulated interest charged in a year)
- What does my prospective amortization schedule look like? (A breakdown of your monthly payment detailing how much goes towards interest and how much towards the principle)
Most importantly, don’t be afraid to negotiate with the bank, no matter if it’s JP Morgan Chase or if it’s a Mom & Pop local credit union. Make sure you’re getting a great rate, your loan officer is willing to explain each line item to you, and your lender gives you multiple options in terms of the length of your loan and the percentage you’re willing to put down.
Search for a Property
Now, once you’ve found a lender offering a great deal, you can start making offers on properties. You can do this through a Realtor or just search through a variety of online resources like Zillow, Trulia, Redfin, and others. Just Google around and find what works for you. If you are using a Realtor, make sure they’re investor-friendly by asking if they’ve previously worked with investors, what their experience was, and if they’d be willing to put you in contact with a former investment property buyer.
Be sure to ask your Realtor to set up reoccurring MLS emails (A list of properties matching your criteria sent to your inbox) on the types of properties you’re interested in. While hunting I’d suggest searching for properties that are ‘for sale by owner’. Here you’re cutting out the realtor middleman (or woman) and getting straight to the owner.
This is one of the best situations to find great deals. Regardless, there are plenty of ways you’ll want to search for properties; REO bank-owned (Properties banks have possessed due to foreclosure by a bank), auction (A quick way to buy and sell real estate often sight-unseen), driving around and sending letters to distressed properties, or even checking a town’s tax records and finding a name that appears often – a possible investor – and contacting them directly to see if there’s a property they’d like to sell. Use all of these tools in your property catching arsenal, and you’ll be well equipped.
Get your Ducks in a Row
Usually, people first look into this once they’ve found a property and had their offer accepted, however since we don’t wait and settle like the majority and since you’ve read this article, that’s not you.
- Locate and get prices on a trustworthy and reliable Home Inspector, these guys will help make sure you didn’t miss anything. They’ll give you good advice on what needs to be fixed before your purchase, and what will need fixing in the future.
- Get in touch with a Real Estate Lawyer. Stay away from lawyers who don’t specialize in real estate, and check with various Lawyers about their costs and what they cover, such as holding the escrow, checking for liens on the property, and validating the home insurance you’ll purchase.
- This brings me to my next point, find a Home Insurance company and speak with a Rep about insurance costs for an investment property. Since they’ll need specific information about your property, it’s fine to wait until you’ve signed the Purchase Agreement.
- Finally, talk to people in your prospective area about handymen or contractors they can recommend. If you find a great property but it needs some work, referred handymen can be lifesavers, and thus wallet savers.
Once you have a general idea of what these costs will be, you’ll be in much better standing for what’s to come once your offer is accepted. Better yet, you’ll grow a stronger understanding of everything involved in a real estate deal, and build a rapport with people you’ll soon need.
This will also be a great time to get some paperwork in order, once you reach out to a bank with an accepted offer. A traditional lender will typically want:
- Your W2’s for two years
- Two or more months of bank statements (with enough for a down-payment, closing costs, and reserves)
- Verification that your bank statements don’t show any large deposits (or an explanation for each if they do)
- Two months of statements for any retirement accounts you have
- An explanation for any credit checks you’ve had
While all of these requirements might seem a little intimidating, the lender is just trying to make sure you’re a trustworthy person to lend to. If you were giving someone thousands of dollars, wouldn’t you want to know them better? Anyway, now you’re empowered with knowledge of what they’ll ask before they ask it, so you’ll be ready when they do. The quicker you are, the quicker you can close!
You’ve Found a Great Property
Great!, you found a great property and you want to make a competitive offer. Make sure that this property makes sense as an investment. You’ll want to look at a couple of things.
- Does it cash flow? (The difference between the rent and your expenses)
- Am I taking into account money I’ll need for maintenance or any large repairs?
- Am I accounting for time it might be unoccupied?
Search for Real Estate Calculators and find a premade spreadsheet or calculator that will run the numbers and help you verify that you’ve got a good deal! Now, once you’re sure your property is golden, check the area for comps – comparison properties that match or are similar to yours and have recently sold.
Make an offer under this number depending on if it checks out with your cash flow test. Or if the property has been on the market for a couple of months, and the owner seems eager to move out, dip your offer even lower. Sometimes you might feel nervous or even foolish for what you want to offer, however you never know what they’ll accept unless you ask. Take that first step; a property is only worth what people are willing to pay for it!
Your Offer is Accepted!
Awesome! Your offer got accepted and you’re ready to take ownership. Inform your lender of choice, and get ready to send them the paperwork you got in order. Contact the Lawyer you found and get things rolling on their end. Confirm a date for the inspection with your home inspector. Create a timeline based on important dates given to you by the bank and your Lawyer, and make sure the ball is effectively passed along from person to person with nothing held up. If something is, get it to the requesting party as soon as you can, and verify that everyone’s on the same page.
You are Clear to Close
Once the bank gives you the Go-Ahead and you’re cleared for Closing, there are still a couple more things you’ll need to pay attention to.
- Pay attention during your final walkthrough, make sure to note and bring up anything you have questions about or are just now noticing.
- Make sure you have enough in your accounts for the amount needed at closing.
- You’ll also want to make sure you have, or will have, funds to change the locks on your new purchase, and make any immediate repairs to the property in case you find something you’d like to change.
- Register as a landlord in the town of your purchase (not all towns require this and those that do might have a fee).
Now finally, after being well informed, doing your due diligence, and getting a great deal, you’ve purchased your first investment property! Congratulations! This is a big deal! Give yourself a good night’s rest because tomorrow, you’re going to start looking for a great tenant!
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