Transitioning from aspiring real estate investor to actual investor isn’t always easy. If you’re new to real estate investing and you’re ready to begin benefiting from the passive income that investments offer, this guide is for you. We’ll review a few tips to help you secure your first investment property.
Tip # 1 – Create a Plan
Creating a strategy ahead of time can help you better understand your real estate investment goals. Real estate investing looks different, depending on who you ask. Some investors swear by buying homes in need of repairs, making such repairs, and then selling for a profit. Others prefer buying and then renting out the property to tenants.
Commercial real estate may also be an option for some investors, which is similar to investing in a long-term rental. However, you’ll lease your building to commercial businesses instead of residential tenants. Deciding the type of investment can also help you narrow down your property needs and budget.
The investment type you choose will also determine the best location. Some cities are better suited for residential tenants, whereas others cater more to business owners. When it comes time to seek funding for your investment project, investors will want to know what your plans are and how you intend to make money.
Consider areas that are highly in demand and currently have many renters. Pay close attention to cities with new businesses or offices opening up, which indicates their employees will need a place to live.
Tip # 2 – Secure a Down Payment
You’ll likely need a down payment if you plan to finance your investment. Investment properties typically require a higher down payment than residential ones do, so it’s never too early to start saving. On average, you can usually expect to pay anywhere between 20% and 50% to qualify for investment property lending.
Tip # 3 – Research Lending Options
It’s also a good idea to research your lending options now. Even if you don’t have a property in mind, knowing your lending options ahead of time ensures you’re ready when the right one comes along. Investors have a few options when it comes to financing a property. A conventional loan is a traditional loan that the government doesn’t insure. While an investment property doesn’t qualify for Federal Housing Administration (FHA) loans, it may qualify for a conforming conventional loan.
Some investors may turn to hard money loans, which are privately-sourced loans. Hard money loans may be easier to qualify for than conventional loans but usually come with higher interest rates and faster repayment periods. Most investors who use hard money loans use them to acquire a property and then refinance it at a later date.
Some lenders may use the equity they’ve built in their homes or other investment properties. If you have equity, a home equity line of credit or cash-out refinance may be a few options.
Another financing option designed specifically for real estate investors is the debt service coverage ratio (DSCR) loan. A DSCR loan has less strict eligibility requirements, making it an ideal option for investors with limited income or high debt. DSCR loans may also be an option for borrowers with less-than-perfect credit. Lenders calculate DSCR loans on the projected revenue of the property rather than your debt-to-income ratio.
A DSCR loan in Kentucky or any other U.S. state can be an excellent and more convenient way to fund your first investment property.
Tip # 4 – Calculate Costs
A down payment isn’t the only cost you’ll have to cover when financing an investment property. A thorough understanding of these costs is crucial as you acquire your first property. Some lenders require investors to have cash reserves that cover the costs of a property for at least six months. You’ll also want to factor in taxes, insurance, maintenance, and repair costs.
Most cities and counties require rental properties to undergo an inspection before they can be rented to tenants. It’s also important to factor in carrying costs until you secure a tenant, including mortgage payments and utilities. Don’t forget about the marketing or property management costs that it takes to find a tenant and then manage their lease agreement.
Calculating these costs can also help you prepare for the DSCR or other loan applications. Lenders will want to know how you’ll use the money, how much, and when you expect to earn returns.
A lot goes into investing in real estate, including choosing the right lender and understanding the carrying costs. However, once you create a strategy and find a tenant, you can begin collecting passive income and earning equity. Creating a plan, securing financing, and understanding your costs can all help you acquire your first investment property.