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2021 beginners guide to real estate investment

real estate investment
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The real estate market is more lucrative than ever and has been on an upward surge for the last five decades. Houses have appreciated and rental prices are rising as well. These figures may be stressful for regular homebuyers but for a potential investor, they are an assurance of good tidings to come.

Contrary to common belief, real estate is not the preserve of the stinking rich in society. Real estate is the perfect venture to add to your portfolio if you are just developing an interest in the market.

This does not mean that it is easy. You need to consider several essential factors to ensure that you are well-set to start investing in real estate property. Let’s have a look at the most vital things to consider in this promising venture.

A good credit score

Your credit score determines whether you get approved or rejected for an investment loan. As such, you need to go through your credit report so you know if you are safe or need to improve it.

Excellent credit scores range between 750 and 850 while poor credit scores are between 600 and 649. Most lenders demand credit scores of 752 and above to be considered for a real estate loan. This is because a bad credit score portrays poor financial responsibility and the possibility that you might not pay back the money loaned to you.

Since credit scores are achieved with long periods of financial credibility, you might want to get a head start on improving yours. You can start by paying your bills on time, making punctual payments for existing loans, and avoiding overdraws from your credit cards.

How your credit score affects interest rates

High credit scores mean your lender is confident that you will repay your loan punctually. As such, you will enjoy lower interest rates and mortgage fees. Some lenders even downsize the down payment you are expected to pay if your credit score is impressive.

A credit score below 620 may get you a loan but see you paying higher interest rates. Lenders will also be inclined to award you a larger down payment to compensate for your lack of good credit.

Alternative ways to finance your investment

The analysis provided above does not spell utter doom for you if you have a bad credit score. You can opt to invest through some of the following routes:

• Hard money loan

This is a loan that requires real property as security. Most investors consider it as their last resort. The money is lent by a company or individual instead of a bank. They are also funded faster because these types of loans depend largely on the collateral provided.

Hard money loans are characterized by the loan to value ratio (LTV). It is calculated by division of the loan amount ratio by the value of the collateral property. There are also additional fees that accrue in the form of points throughout the duration of your loan. Lenders usually lend more than 65 to 75% of the property’s present value.

• Wholesaling

This involves finding real estate properties at significantly lower prices than the market value. You then hold them by use of a special kind of agreement with their owners and look for a buyer to buy your contract. No down payment or credit requirements are involved but the process is very time-consuming.

These methods may seem like viable alternatives but they come with exorbitant interest rates and may prove detrimental to your investment if things go awry.

Down payments

Buying real estate property demands quite a large down payment. Most down payments for properties range between 20 and 50%. These high rates are because mortgages with low down payments demand mortgage insurance which is very difficult to obtain for investment estates.

Pros and cons of lower FHA down payments

FHA loans are very attractive for first-time investors but they have their downsides. They are characterized by simple credit requirements and relatively low down payments. Let’s have a look at some of the reasons that make them an excellent but limiting choice.

Pros

  • FHA loans offer small down payments of as low as 3.5%
  • The cost of closing is much lower
  • They are available to borrowers with low credit scores of up to 580
  • FHA offers loans to clients with a maximum debt-income ratio of 43% while other lenders demand a ratio below 36% and inclusive of housing.
  • Can be used to buy rental properties with a maximum of four units if you plan to live in one of the units. They approve customers looking to buy manufactured homes and condos as well.

Cons

  • FHA loans demand upfront mortgage insurance premiums of up to 1.75% of the sum of your loan. Additionally, you ought to pay a premium of 0.85% of your loan annually.
  • Their loan limits are lower than those for standard loans. For instance, locations like Madison, Wisconsin have a maximum limit of $316250 while others like San Diego, California enjoy a maximum of $690,000.
  • They have minimum property requirements that are intended to protect you from buying substandard property but may hinder you from buying the home you want. This is especially troublesome if you plan on investing in an old home that requires some sprucing up.

Why you need to work with a good realtor

It is easy to overlook hiring a real estate agent so you can save some money but that might not be the best idea. Here are some of the benefits of hiring a reliable Realtor.

• Understand the locality

You most probably have the kind of property you want to invest in laid out down to the size, neighborhood, and features. However, searching for that home in a new area can be time-consuming. A good agent can help you pinpoint the kind of home you want in record time.

• Know the market

The property market is prone to changes in current trends, inflation, and mortgage rates, among other factors. Experienced Realtors keep track of these changes and are better placed to advise you on the best course of action.

• Beneficial networks

Realtors have gathered numerous helpful contacts in their line of work. They can link you to appraisers, real estate lawyers, and mortgage experts to aid in your investment efforts.

• Keen eye when assessing property

They can spot small or emerging flaws in a property that you may not have noticed. Your realtor looks out for your interests and advises you on what properties are worth investing in and which ones aren’t.

• Excellent negotiation skills

Realtors have negotiated tens of property sales. As such, they know what skills to employ to get you the best price within your budget.

Get pre-approved

Before you hire a realtor, it would be best to get pre-approved so that you know your purchasing power and set a realistic budget. Most lenders are willing to draft personalized pre-approval letters for every offer you tender on a property on sale.

Pre-approval also helps you bag a good realtor. Most agents ask for it because they would rather not spend their valuable time on a window shopper who isn’t likely to buy. Some lenders even recommend reputable real estate agents.

Final thoughts

Investing in real estate can be a life-changing venture and as simple as it may sound, it is not advisable to go it alone. Being new in the market means that there is a lot you are yet to learn and you do not want to learn from grave mistakes. We hope that this post has given you the necessary insight you need for a smooth-sailing investment experience.


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