Are you thinking of getting started with real estate investing?
Real estate investments — in all of their varied forms — continue to attract capital, because of their ability to provide solid returns in a world of falling interest rates. Real estate investment trusts (REITs) and private equity (PE) real estate funds have been helping to boost returns for many investors in recent years, while the immediate and long-term benefits of direct investment in single-family rentals (SFRs) have made them attractive to small-scale and institutional investors alike.
There are a number of things that make real estate — and in particular, SFR properties — an attractive asset class. For one thing, income properties offer cash flow every month. They also offer the long-term benefits of equity growth and appreciation, as the mortgage is paid down and as the property, ideally, appreciates in value. Not to mention, rental property has the added benefit of leverage — the chance to use the bank’s money to grow your own. Finally, income property offers the chance for some decent tax breaks as well.
If you’re looking to add SFR investments to your portfolio, here’s a look at some tips for getting started.
Assess Your Finances
First, you’ll need to know where you stand financially. Do you qualify for a decent loan? How much of a down payment could you make? It’s also important to know your credit score. When it comes to securing a loan with a low interest rate, a good credit score (generally, above 740), and the ability to make a large down payment will help.
Create A Plan
You’ll also want to take the time to establish your long-term investment goals, and create a plan for investing. If you’ve already decided on SFRs, make sure you outline your criteria — that is, what type of returns are you looking to generate (12%? 15%?). Then, resolve to invest only in property that meets your criteria. Keep in mind that an inexpensive property doesn’t automatically indicate a good deal. At the end of the day, you’re after returns, so take the time to do your research and run the numbers — for both projected income and expenses — to determine a property’s yield and see if it has good investment potential.
You don’t have to rush out and purchase 20 properties in two years. Many real estate investors start out much smaller. Some investors even start out with a duplex or house with a basement apartment, living in one unit while renting out the other. This approach could allow you to qualify for a first-time buyer mortgage (with far better loan terms, including a lower interest rate). It will also give you a chance to learn the ropes before you start adding to your portfolio, before there’s a lot more at stake.
Find The Right Property
Next, it’s time to find your first investment property. Keep in mind that when investing in real estate, you aren’t limited to your own backyard. In fact, looking outside your own local area means that you’ll be able to take advantage of potentially better housing and rental markets, allowing you to find an investment that fits your criteria.
You’ll want to secure financing early on. Getting pre-approved can help you move quickly when a deal arises. If you’re a first-time buyer you may be eligible for an FHA loan and a low down payment of 3.5%, but this means you’ll have to occupy the property yourself for a specific period of time.
For investment property, the loan terms are a lot more stringent. Generally, you’ll need a much as 20% or even 25% for a down payment. The bank will also typically require a breakdown of your assets and annual income, so you’ll want to compile this information in a spreadsheet. They’ll also want to see your debt-to-income ratio, and ensure that it’s no more than 40-50%. Keep in mind, too, that if you’re buying an inexpensive investment property as a fixer-upper, most banks will want to see a cash buyer.
If you’re having a hard time meeting the bank’s requirements, keep your eyes open for alternate sources of funding such as private funding, owner financing or even joining forces with an investment partner.
Create A Plan For Management
Before you dive in, you’ll also want to consider whether you’re fully prepared to be a landlord. I know firsthand that overseeing rentals is a lot of work, and you’ll want to make sure you’re ready for all of the responsibilities that it entails. A knowledge of landlord-tenant law, including fair screening policies, is vital. Also key is ensuring that you’re protected with a rental agreement from the start.
If you’re looking for the financial benefits with less hassle, you can hire a property manager to oversee much of the work for you. (Full disclosure: This is one service my firm offers.) A good property manager will be able to handle tenant sourcing and screening, rent collection, repairs and, when necessary, evictions, saving you a significant amount of time in the long run.
Assemble Your Team
Once you have decided when and where you want to invest, it is important to start networking and building a team. Having a good support network allows you to sidestep many common issues that befall first-time and even experienced landlords, and can make a world of difference when it comes to embarking on a successful investment career. In addition to a property manager, you’ll also want to consider enlisting the help of local investor-friendly real estate agents as well as an attorney for drafting up rental agreements and policies. You’ll also want to consult with a CPA to see how owning rental property will impact you from a tax perspective.
Successful investing requires a significant amount of time and research upfront, but the good news is that it gets exponentially easier with each property that you acquire. Once you learn the ropes and get the ball rolling, you’ll be able to start growing your rental property empire and benefiting from the immediate and long-term rewards of real estate.