Many people have thought about getting into real estate but felt they did not have the resources or expertise. Many of these people have feared failure and felt it too hard to achieve that goal. Fear tends to delay moving forward but there are many strategies that can help you move forward. Following are steps on how to get into real estate when purchasing your home and using equity to fund investment property:
Why invest – Real estate is more than wealth-building it is creating financial freedom. It is a means to leave your current job and create generation wealth and make a difference in your community. Knowing this will keep you motivated through the ups and downs. Decide what dream you want to fund and legacy you want to leave.
Investing in Yourself – Best way to become a millionaire is investing in yourself. Before start playing with money, you need to gain knowledge from people who have become millionaires. Learn from them by avoiding the mistakes they make. Also read books, listen to podcasts and involve yourself in blogs. Investing in yourself you need to attend conferences, hands-on workshops, seminars and events of like kind.
Down Payment – Need to save for a down payment. If you already own your home use your equity as a down payment. If you are leasing your home, consider FHA or VA loan to purchase a home. These loans allow you to purchase a home for 0-3% down. Conventional loans usually require 15-25% down payment. In order to achieve your goal, you need to set up a separate savings account and contribute to it each month. This means cutting out unnecessary expenses and doing some freelance work. Another option is to purchase a multi-unit property, reside in one unit, and rent out the remaining units.
Credit score – Having a high (having 720 to 850 is best) credit score is important to get the best interest rate when investing. This will save you thousands of dollars on loans and increases available cash flow. Ways to improve your credit score: pay off outstanding debt on high interest credit cards, make on-time payments, don’t allow your credit utilization to go above 30% on available credit, avoid adding more credit lines, and pay off credit cards monthly.
Home equity – Finance your first investment using equity you have accrued from your home. You can borrow funds using your home’s equity to fund first investment.
After you become a homeowner and start investing in rental properties you need to develop a strategy. Following are tips to help you make smart investment decisions:
What will the investment rent for - Before purchasing the investment property determine how much the property will rent for. Rule of thumb is the property should rent for least 1% of purchase price. Make sure the rent covers expenses like mortgage, insurance, taxes, etc.
Median household income – Determine the median household income in area you want to purchase investment property. If the median household income is $100,000, then you need to invest no more than 3-4 times of median income. In this example you should purchase property between $300,000 to $400,000. Use the local real estate reports to find out income data.
Local Banks – As a new investor consider using local bank or credit union for financing. These institutions often offer better options. Local banks are often flexible with financing because they want to cater to the local community while large banks sell their loans to Fannie Mae and Freddie Max which can limit how many mortgages they can make.
Team building – Real estate investing involves developing a network team of real estate specializes in real estate which includes the following people: real estate agent that specializes in investment properties; property manager that handles tenant placement, maintenance and rent collection; lenders such as banks, and mortgage brokers; CPA who specializes in real estate tax strategies; attorney that oversees contracts and LLC structuring protects your assets.
Making money – Investors make money when they buy. Buy properties below market value; this gives you equality at the start. Strategy is to buy foreclosures, off-market deals, and distressed properties. Also consider buy, rehab, rent, refinance and then repeat, doing this without tying up a large amount of capital.
Neighborhoods – When investing real estate buy in middle-class suburbs that offer affordable housing, working-class areas with strong rental demand and good cash flow. Avoid luxury, high crime and declining property value areas.
Cash – If you are short on cash, one strategy is flip a property and use the profit to invest in long-term rentals. When buying a flip, you buy an undervalued property, then fix it up and sell it for a profit. You should be able to generate $20,000 to $50,000 to use as a down payment for your next rental. When doing this, look for properties that need only cosmetic upgrades versus structural repairs.
Exit Strategies – Investors should have several ways to profit from an investment. 1. Long-term rentals usually lease for consistent passive income. 2. Short-term rentals such as airbnd, executive rentals usually rent at high daily rates. 3. Fix & flip, buy, renovate and then sell for profit. 4. Lease-to-own allows tenants to buy property after renting for a few years.
Investments - Set up an LLC for each property or at least set up a separate LLC for every few properties. By doing this you protect yourself from liability of your personal assets in case of lawsuits due to tenant disputes or creditor claims. Finally, buy an umbrella insurance policy that will provide extra protection.
Motivation – As investor it is about making money, difference and leaving a legacy. Need to set financial goals, keep learning and trust in God for your success.
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