This is a guest post from a good friend of this blog. Miranda writes for a number of financial web sites, including her own blog, Planting Money Seeds. I will be discussing Real Estate in the coming weeks as it becomes a bigger part of my passive income strategy. Here are a few good tips to get started:)
Depending on where you live, real estate prices are as low as they have been in years. As a result, it’s tempting to decide to buy property as an investment.
Whether you plan to use the property as an income stream (mostly likely earning money from rents paid by tenants), or whether you want to turn around and sell it for more later, there are some basic tips to follow as you prepare to purchase an investment property.
1. Begin with What You Know
First, determine what you know. Whenever possible, start with something that you are familiar with. From fixer-uppers, to condos, to duplexes, consider your strengths, and what you understand. Start with what you know, and as you see success, expand your education and your investment horizons.
You might not even need to branch out into other types of property. There is a lot to be said for capitalizing on your strengths, and specializing in one particular type of property.
2. Compare Property Values
Do your homework. You are looking for deals, so you want to make sure that you really are getting a good deal. Run various real estate calculations to determine whether or not you should buy. Compare property values to nearby properties. Additionally, you can look in local papers, and on real estate web sites, to determine the type of rents you can expect to receive.
Start out in your local market, since that is what you know best. Look around for good values, and do your homework so you will recognize a deal when it presents itself.
3. Understand the Costs
What costs come with the property? Will you need to spend money to fix it up? Are there costs associated with utilities and maintenance? Know what you are getting into before you make a decision. If you are purchasing a property that already has tenants, you should be able to see a cash flow statement from the seller. This can be very helpful in determining your expected costs, as well as understanding whether or not the income you can expect covers those costs.
4. Prepare for More Stringent Mortgage Requirements
Chances are that you will need a mortgage in order to buy investment real estate. Prepare yourself for more stringent requirements. Anytime you buy a second (or third or fourth) piece of property, you are considered a bigger risk by the lender. As a result, you need to prepare yourself for strict requirements.
You will need to prove your income, and you might even need to present the lender with a plan for making money on the property. At the very least, you will probably need a good credit score in order to gain approval. You might also need the full 20% down payment (although some lenders will let this slide).
In some cases, it makes sense to partner with someone else to purchase the property, or get help gaining approval for the loan. However, you will want to set up a legal entity for your partnership and make sure that you are protected.
Before you buy, always have the property inspected. But it’s not just the property itself that needs a thorough going-over. You should also inspect the title, and figure out what insurance will be needed. Also, consider the tax situation. It can help to have a knowledgeable real estate attorney, or a competent accountant review the tax situation so that you know exactly what to expect. If you are in the armed forces there are some great on-line tax software programs that are tailored for your unique situation (e.g.Turbo tax Military Edition).
Purchasing investment property is exciting. However, you can’t let that prevent you from taking a step back, and really considering the situation. Take a measured approach to real estate investing, and you’ll be much better off.
What other tips do you have for investing in real estate?