This seems a little impossible for many. Surprisingly, many people think this is the only way to getting started in real estate. Sadly, nothing kills a beginner real estate investor’s ambitions more than believing they will never have enough money to get started in real estate. The question worth asking is how much money do you really need to get started in real estate and buy an investment property? It’s time for a reality check!
Let’s begin by breaking down what you can realistically expect to have on hand. There are four major expense categories that you must be aware of and take into consideration before getting started in real estate.
Related: The Ultimate Guide to Getting Started in Real Estate Investing
#1: Getting started in real estate: The purchase price of the property
Obviously, the lower a property’s price is, the less money you will need to purchase it. However, many people tend to look for investment properties in the same area that they live in. If you live in an area where housing prices are extremely high, then buying an investment property might seem impossible. You need to always keep in mind that buying an investment property is not the same as buying your own home. An investment property is like owning a type of business where your number one goal is to make money and generate a profit. That is why you need to look for areas that offer low property prices so that in the future you won’t find yourself in a financial mess. Affordable houses appreciate faster, generate more cash flow, and are affected less in an economic downturn.
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Here are two simple tips to keep in mind about property prices:
1. BUY AROUND THE MEDIAN PRICE
Find out the median price of single-family homes in your city. A realtor can help you with this or you can use an investment property calculator. If you were to take all the homes sold in your area from least to most expensive, the median price is right in the middle. After you’ve found out the median price, set yourself an initial price range and include houses that are between 50% under the median and 25% over it. If you buy an investment property that is anything higher than 25% over the median, then your mortgage payments will be so high that your cash flow will be weak.
2. NEGOTIATE!
Many real estate investors forget that property prices are negotiable. Unless you’re in a very hot real estate market, it never hurts to make a lower offer.
#2. Getting started in real estate: Saving your down payment
In terms of the purchase price, less is more. The more leverage you have when borrowing a loan to purchase your investment property, the less money out of your pocket is needed and the higher your cash on cash return will be.
Before you even think about getting started in real estate, you need to make sure you have all your other obligations under control. Make sure you are free of any debt, especially high interest liabilities, before you undertake this financial commitment. Once you’re free of debt, you should save enough money to put down a 20% down payment on your investment property. Also, most lenders want to see six months of mortgage payments in your bank history. So start saving up!
Read Also: How to Save Up Money for a Down Payment for Investment Property
#3: Getting started in real estate: Estimating repairs and maintenance
Here is where many beginner real estate investors get stuck. They find the right rental property, save up for a down payment, and make the purchase thinking that they’re ready. With real estate investment properties, the cash requirements don’t simply end at purchase! It’s going to take money to maintain the property and keep it in a rentable condition and this is where investors so often miscalculate. How much money is needed depends on two things: the initial work needed to get it rentable and the average annual maintenance costs.
If your property initially needs a lot of repairs, then you need to factor in a repair budget for items like paint, cabinets, appliances, and anything else needed to make it rentable. Having an idea of the amount of money you will need for repairs will help you save a lot before getting started in real estate and purchasing the property.
There are other costs to take into consideration before getting started in real estate such as holding costs and maintenance costs. You will need to make sure that you have enough to cover the mortgage payments, property insurance, and taxes for 1-2 months while you’re fixing it up and finding a tenant. You must also keep in mind that there are things that you will have to pay for on a yearly basis like cleaning the gutters.
This can all sound very daunting for many beginner real estate investors especially if you don’t know how to fix anything up by hand. That is why you need people to lean on during these situations like a property inspector and a handyman.
Related: Investment Property Costs to Consider This 2018
#4: Getting started in real estate: Saving emergency reserves
Some other important issues that you must factor in before getting started in real estate and buying a rental property are vacancies and other “unexpected” costs. You’re going to experience having a vacant property at one point or another so be prepared for this scenario. Until you can find new tenants to occupy your property, you’re going to be paying the mortgage from your own pocket.
Planning for these situations can go a long way. You can retain tenants longer if you screen out all the bad applicants and take care of the ones you allow inside. And always remember that it’s always better to overestimate your costs rather than underestimate them especially in terms of emergency reserves costs.
The bottom line
No one said that getting started in real estate and purchasing an investment property would be easy. That is why you need to carefully think things through and make sure you’re financially prepared. If you feel like buying a rental property will do you more bad than good financially, then postponing the thought of getting started in real estate would be your best option.