Thinking about dipping your toe in the real estate waters? Investing in real estate property is a proven money maker—but one that requires careful consideration and market knowledge to get the highest return on investment and limit risks.
The first thing a new investor needs to do is make a solid game plan that includes financing strategies. Here are five tips that will put you on the direct path to success in financing investment properties.
1) Increase Your Chances of Getting A Loan
If you plan to take out a mortgage, invest some time preparing. The best rates and terms are offered to those who can show they are responsible with money. You can increase your chances of getting a mortgage by:
- Paying down existing debt. Get student loans, credit card debt, car loans, and other personal notes paid off in full, or at least reduce them significantly.
- Check your credit history. Review your credit file for old delinquencies, charge-offs, and errors that could make lenders hesitant to give you a loan. Discuss ways to boost your credit score by talking to a credit counselor or a financial advisor at your local bank. And, make a written request to the bureaus to correct any outdated or erroneous information in your record.
2) Number Two: Take Baby Steps
It can take several months or even a few years to build an excellent credit profile. People with credit or income challenges may be able to get started by exploring FHA 203K loans. These are for people who are prepared to live in the home for a few years fixing it up, so they can sell it or rent it for a profit later on.
This loan type typically only requires a 3.5 percent down payment, and you can borrow even to purchase a property and pay for necessary upgrades or repairs.
Another option is the lease-to-own plan, where you ask that you include owner financing in the rental contract. There should be a buyer’s option that applies to all or part of your monthly payment toward the purchase price.
Remember, you don’t have to go from zero to 60 in a few weeks, be prepared to take small, consistent steps on the road to becoming a successful real estate entrepreneur.
3) Find a Business Partner/Investor
When financing on your own seems impossible, look for a funding partner. Your startup funds may come from:
- Private sources, such as friends, family, and business associates.
- Crowdfunding sources, such as GoFundMe and other social fund-raising sites.
- Professional sources, such as Angel Investors and private mortgage groups.
You do not have to enter into a 50-50 partnership or limit yourself to just one other party. Get creative! Ask a group of 10 or 20 friends if they want to join you. Just be sure that you hire an experienced real estate lawyer to help you with the paperwork and be prepared to hire a tax accountant to help with the annual tax return.
4) Consider a Turnkey Real Estate Solution
For those who are risk-averse—meaning you always prefer an investment option that has lower risks, even if the return on investment potential is also lower—a turnkey real estate solution may be the best option.
Buying a turnkey rental property means you purchase a property that is already rented and professionally managed by an outside agency. This option, especially if you get this type of property on an owner-financed arrangement designed around your financial resources and investment goals, can be extremely low-risk.
Look for a rental property that has been on the market for at least a few years. This allows you to review financials to discover how well the property performed during different market conditions, ownership expenses, and revenue potential.
This type of investment is practical for those who want to purchase property in another city or state to take advantage of better market conditions or financing terms. Do your due diligence. Some turnkey providers offer low down payments, while others take on extra fees that make or require a higher interest rate to step right into a money-producing venture.
5) Be Realistic
Perhaps the most important thing you can do as you look for financing vehicles to fund a real estate investment is to be realistic. Potential lenders aren’t interested in hearing about how you plan to turn your $1000 cash investment into a $1 million surplus in six months. They want to know you understand the real estate industry and are prepared to do the work to get higher profit margins for yourself, and the rate of return you agreed to for them, on their terms.
Being realistic when you’re just starting out means you may have to pay higher interest rates until you establish a positive payment history. And, homes in your price range may not be in the best condition or the most desirable neighborhoods. Even so, many people have started slowly and built a portfolio that provides a steady income while the value grows over time. You can build a diverse, profitable portfolio, too!
While you need realistic expectations about which property you can buy when you’re just starting out, you also need to be realistic with budgeting and forecasting. Creating a realistic operating budget shows potential lenders and investors you have thoughtfully considered your new career path.
Your project budget should include everything—and we mean everything. Be sure to include things like:
- Monthly mortgage
- Property taxes
- Insurance (Remember to set aside money for insurance deductibles. Your insurance policy may cover roof damage from a storm; however, you will probably have to come up with a deductible that ranges between a few hundred and several thousand dollars.)
- Repairs and renovation costs
- Attorney fees
- Property management fees (if appropriate)
- Accounting and tax services
- Money lost due to vacant days (it is very unlikely you’ll enjoy 100 percent occupancy rates.)
- Make ready costs (this is an expense item for painting, repairing, and cleaning a rental to get it ready for the next tenant.)
- Computer and other technology (if you plan to manage your rental property, you may want to invest in a customizable property management software package.)
- Licenses and permits
- Office Supplies
- Website costs
You Don’t Have to Do This Alone
Financing real estate investments can be a complicated process. It doesn’t have to be overwhelming. Turn to professionals who can help, such as an experienced attorney, licensed broker, professional property manager, or banker in your neighborhood for helpful advice.