A Beginner’s Guide to Real Estate Investing
Think real estate investing is just for old married couples featured in TV infomercials? Wrong! I was about 30 when I bought my first piece of property. It was a two-bedroom house in a quickly appreciating neighborhood in Orlando. It was the cheapest good quality house in the area, and I netted $30,000 by flipping (reselling) it eight months later.
I wish I had started investing sooner.
The only reason I didn’t invest was because I didn’t understand the process. Now, I buy two more homes every time I sell one.
Here are the basic steps for investing in real estate:
1) Determine your strategy early: flip, renovation, or long-term rental. Do you want to hunt for something undervalued, hold it, and then flip it in the coming months? Are you a skilled carpenter, or do you know what’s involved in a renovation? Are you willing to deal with a renter? If so, the renter will pay your mortgage and give you some immediate profit.
2) Interview realtors. Don’t waste everyone’s time looking at property with a realtor until you know you’re with someone who is investment-focused. Most realtors will not be able to tell you the basic numbers you’ll need on a property. A good place to research these is TheSRE.com, the real estate investor networking community.
3) Interview mortgage brokers. Once you find a realtor, ask for three broker recommendations and check out what your local bank or credit union offers. You’ll want to know what each offers in terms of interest rates and closing costs. Bring a copy of your three credit reports to your meetings, along with a sample property (in the same price range), so they can run hard numbers.
4) Put contracts on the cheapest house in the best neighborhood. These contracts will put you in control of that market. For example, let’s say the cheapest two-bedroom house in the best neighborhood in Nashville costs $100,000 and the next cheapest, comparable home goes for $140,000. You can buy the home at $100,000 and raise your price to $130,000 the next day and still make a profit.
5) Contract to Close. You’ll sign a contract, show the seller a pre-qualification letter from your lender, and get your home and termite inspections. Next, your lender will do an appraisal of the home. If you want to renovate the house, a Purchase and Renovate loan may appeal to you – this wraps the cost of construction up in the loan so you have few out-of-pocket costs – and this may require an estimate from a general contractor and plans from an architect. Once your lender approves the loan, you will close on the house. In general, this process takes about 30 days.
Flip: Just sit and wait until the market allows you to sell at your target price. You don’t even need to turn on the utilities until you go to resell it.
Renovate: In general, your lender doesn’t care if you use the general contractor who provided them with an estimate, so make sure you’re working with a solid crew who will get the project completed on time. You can burn up a lot of money if they’re inattentive to your house. Once the project is done, determine how much property in the neighborhood is selling per square foot, and you’ll know your new sales price. Also be aware of 1031 strategies if you have more than one property.
Rental: Go to your local hardware store and buy a sign that reads, “For Rent.” Include your cell phone number on the sign. Drive around the neighborhood and determine what the average rent is for the number of bedrooms you have (renters care more about bedrooms than square footage). Then ask your lawyer for a lease agreement, or just find one through a link at TheSRE.com. Finally, draw up a basic application for potential renters and have them fill it out.
These are just the basics, but they demonstrate that the buying and selling process isn’t too tough. Keep in mind that if you have good credit, you may be able to get loans of up to 100% of the home cost. Also, typical closing costs are about 3% of the sales price, and this can either be paid for by the seller or wrapped into the loan.
Don’t wait as long as I did to try real estate investing. If you’ve got the right motivation and resources, then it may just be the best investment you ever make.