Real estate is an excellent investment because people will always need homes and property is likely to hold its value. In today’s market, there is a shortage of single-family homes, which is making homes even more valuable. However, becoming a real estate investor isn’t something that should be entered into lightly. You will need to do your research and ensure that you are making strategic decisions that protect your interests and aren’t taking on unnecessary risks. Learn more about how you can become a successful real estate investor and earn income from rental properties.
Becoming a Real Estate Investor
Create a Business Plan
Real estate is a competitive market, which can make it both challenging and exciting. It is important that you approach investing like a business and stay organized. Start by creating a business plan that clearly outlines your goals and the steps you will need to take to achieve them. As you add properties to your portfolio, be sure to update your business plan so that you can stay on track and have a clear target to work towards.
You will want to think about all the factors that could influence your investment now and in the future. Calculate expected income from rental properties, expenses you will need to cover, and when upgrades will need to be made to homes. The more detailed you can get, the easier it will be to avoid the unexpected and have an accurate view of your investments and prospects.
Understand the Market
Next, you will need to gather as much knowledge as possible about the market. Do a deep dive into the trends that are affecting properties in the specific areas where you want to invest. Take a look at mortgage rates, unemployment rates, consumer spending habits, and where the area might be headed in terms of development. Construction projects happening around your property could positively or negatively affect your property value and ability to find qualified renters. This may require you to network with other investors, get to know real estate agents in the area, and develop relationships with other decision-makers in your community.
Find Your Niche
Instead of trying to master every aspect of the market and how to handle all different sorts of properties, find a niche where you can truly focus your efforts. Perhaps you want to specialize in high-end residences, or you are more interested in rehabbing homes in rural areas. Choose one area that you can work on mastering before you add different types of projects to your list.
Be Honest and Fair
Ultimately, your goal is to make money, but that doesn’t mean that you should cut corners or fixate on what you can get out of a deal. Keep in mind that becoming an investor also means developing a reputation. You will be working with different agents, lenders, sellers, renters, and all sorts of people along the way. Being fair and honest in all your dealings will help you secure more deals and earn referrals so that you can build a real estate business with a positive reputation. This also means being a good landlord and promptly replying to any inquiries or complaints from your tenants.
Know the Risks
Every type of investment comes with a certain amount of risk and there are no sure bets. Real estate investing can help you earn relatively passive income, but you shouldn’t approach it as a get rich quick scheme. Do your due diligence when it comes to research and make sure that you fully understand the potential risks and feel comfortable taking them on.
How to be a Real Estate Investor
Once you have done all the necessary leg work, you will need to secure financing. Rental property loans will come with higher interest rates and may require a bigger down payment. Lenders tend to view rental property loans as higher risk than a standard mortgage. Fortunately, the loan will be amortized so that you will know the exact mortgage payment you will be making over the course of the loan.
While every lender will make decisions based on their own criteria, here are some typical requirements that you will have to meet in order to secure a loan.
- A credit score of at least 620
- A down payment of up to 25%
- Enough savings to be able to pay for six months of mortgage payments
- A debt-to-income ratio of 36% or lower
These requirements may also vary according to the type of loan you secure. Rental mortgage loans can be used to purchase single-family, multifamily, townhomes and condos. Here are the most common types of rental loans.
You can apply for a traditional mortgage from a bank or credit union or work with a mortgage broker who will work to find you the best terms.
Veterans and their spouses and active-duty service members can secure a Mortgage backed by the U.S. Department of Veterans Affairs. These are desirable loans because there is no minimum credit score requirement and you won’t have to make a down payment.
Once you are established as a real estate investor, you may want to look into a portfolio mortgage. Essentially, there will be individual loans for each property you own, but they will all come from the same lender. This could make you eligible for a group discount.
As the name implies, a blanket mortgage covers many properties under a single loan. This can also be a good option if you want to refinance existing rental properties.
4. Seller Financing
When the seller owns the property without any mortgage debt, they can offer financing, which allows them to earn income from interest rather than receiving the one lump sum upon sale.
Investors can offer financing to property owners. The terms of the loan can be customized based on various factors. Private lenders will sometimes also take a stake in the rental property and offer lower interest rates and fees.
A home equity loan or a home equity line of credit (HELOC) allows borrowers to draw funds from other properties so that they have enough money for a down payment on a new property. With a line of credit, you will be able to pull out funds as needed. An HELOC, on the other hand, will provide you with a lump sum that you can put towards other properties. This is a common strategy for investors who are looking to quickly build their portfolio.
How Can I Invest in Real Estate with Little Money?
The last type of mortgage loan is a good option for beginning investors. If this is your first-time purchasing property and you don’t have the funds for a large down payment, you may want to consider applying for a loan through the Federal Housing Administration (FHA), which is a division of the U.S. Department of Housing and Urban Development (HUD). FHA loans were specifically designed to help people become homeowners.
Essentially, the FHA insures the loan so that the lender feels comfortable offering you the best deal possible. As a result, you may only have to put down as little as 3.5% of the total purchase price. These loans can be used on 1–4-unit properties, which means that you could invest in a property that would provide you with a primary residence along with rental units. This makes FHA loans a good option for anyone just getting into real estate investing.
Maximizing Your Rental Investment with Deca Property Management
As a property investor, you can decide how involved you want to be with maintaining the properties and dealing with renters. You may want to be as hands on as possible or you can hire a property manager and turn many of the regular responsibilities over to a professional. A property management company can provide a wide range of services that include, collecting rent, hiring contractors for repairs, and handling lease agreement paperwork.
If you don’t want any of the hassle that can come with managing rental properties, a manager can even handle the marketing process so that you are not losing money with vacant properties. Of course, all these services come with a fee that will take a bite out of your total profits. That is why many new investors choose to do a lot of the work themselves. Once you have established an extensive portfolio, it may make more sense both from a time and money perspective to hire a property manager.
As a property management company, our primary goal is to add value to someone’s investment property. Our team works with you to find the most cost effective ways to boost demand for your rental home, ensuring maximum rental income and minimal vacancies. Schedule a free consultation to discuss how we can help by calling (314) 631-3306 or by filling out the online form below.