Calculating Your Down Payment

Once you have made the decision to step into the world of home ownership it’s time to figure out how to make that happen.  Your home is likely to be the biggest purchase you will ever make along with being your largest financial asset you need to get your finances in order before you start shopping for a mortgage.  You need to take a close look at your personal finances and assess what you need to do to make your dreams a reality.  Calculating your down payment that works for your financial situation will be your next step.

Your Income

The first thing you want to do is to talk either to your bank or a mortgage broker about your financial situation and what it would take to qualify for a mortgage.  There a number of different types of mortgages all with different requirements.  If you are looking at an investment property then be prepared to come up with at least 20% down.  However if you are looking at your primary residence then there are mortgage options that allow you to put down a much smaller down payment even as low as 3.5%.

Your Credit Score

Financial institutions use pretty specific guidelines in calculating how much of a mortgage you will qualify for.  One very large component of this is your credit score.  If your credit score isn’t quite as high as you like then you may want to improve it before you apply for a mortgage.  The better your credit score the better your interest rate will be.

Cash Available

Have you been saving for the down payment already?  It goes without saying that you can only put down what you have on hand, but you should do everything you can to maximize what you put down.

What Are You Comfortable With

Just because you qualify for a large mortgage doesn’t mean you should spend that amount. How much are you comfortable paying every month?  Avoid being house poor, where your mortgage payment is too high for you to save any money for emergencies.

Monthly Payments

The bigger your down payment the smaller your monthly payment and carrying charges will be.  Lower down payments are generally also tied to higher interest rates.  You should also discuss your mortgage options and whether a fixed rate or an adjustable rate mortgage.

A smart home buyer will consider what down payment make the most sense for their financial situation.  Go into this transaction with your eyes open and not wishful thinking.

Avoiding a Money Pit

You have probably heard the term “money pit” in reference to a piece of real estate.  It is when there are so many repairs needed to the house that it will never be worth what you have paid for it in the end.  It is every home buyer’s worst nightmare but before you put away the real estate listing in fear of getting of buying a money pit, there are plenty of thing that you can do to avoid it.  Avoiding a money pit is easy with the following tips.

Have a Qualified Home Inspection

It doesn’t matter if you’re buying your house from your favorite aunt, your best friend or someone that you trust implicitly you always need a home inspection.  Most people aren’t remotely qualified to determine the overall condition of the home.  While it may look great from the outside you can still have extensive termite damage, roofing problems, cracked foundations and a whole host of other issues that plague a piece of real estate.  You need to know in advance what is wrong with the home and what it will cost you to fix it.  Knowing what the necessary repairs are also puts you in a better position to negotiate the price.

Learn the Difference Between Minor Repairs and Major Repairs

Almost every house you will look at will need some type of work, anything from fixing a leaky faucet to replacing the plumbing.  Minor repairs can usually wait, whereas major repairs cannot.  It will give you a better idea of the total cost of owning this home and whether you can afford to buy it.

Cosmetic or Necessary Repairs

No matter what house you look at there will be something that you want to change, from the paint color to the countertops.  Quickly identify your deal breakers and what you can easily change.  Don’t like the paint color in the bedroom, that’s an easy fix you can do on a weekend for less than $100.  Hate the lime green cabinets in the kitchen, which might be a deal breaker since ripping out the kitchen, can get expensive.

Overestimate Your Costs

Whether you are doing necessary repairs or cosmetic changes to the property always err on the side of caution and overestimate your costs.  Inevitably it will cost more than you think or you will find something else that needs fixing.  For the first year or two in your new home you will probably end up spending a great deal of time and money turning it into the space you want.  You need to know that going in so you don’t find yourself house poor.

Financing Your Investment Properties

You want to break into the real estate market and start building your fortune but there is one big problem….you don’t have the money.  Most people who invest in real estate don’t either and they need to find some way to secure financing.  If you are a home owner then you have already been through the mortgage process and that was fairly easy but buying investment property is a whole different ball game.  Financing your investment properties can be tricky.  Traditional lenders have stricter guidelines.  Let’s look at how financing your investment properties differs from buying your own home.

Higher Interest Rates

These loans are considered riskier so the bank is going to charge you more for the privilege of using their money.  You can expect to add a couple of points to the interest rate so if your home mortgage is at 4% then you can expect a 5-7% interest rate for an investment mortgage.

Your Credit Score

Your credit score matters with any type of loan it is the bank’s way of looking at your ability to pay and your willingness to pay when it comes to loans.  This is the biggest factor in determining whether you will get a loan and for how much.  Keep a close eye on your credit score and take every opportunity to improve it.  A lower score doesn’t mean you can get financing it does however make it more expensive.  Here are some tips on improving your credit score.

Higher Down Payments

Get used to 20% down it is pretty much the industry standard when it comes to investment properties.  Yes there are exceptions but for the most part you will need it.  The good news is that you won’t be required to pay for mortgage insurance.  You are also going to need some operating capital, the banks won’t take you seriously if you’re not prepared to have some cash on hand.  At the same time you don’t want to be broke if the furnace dies in your new property either.

Buy a Multifamily as Your Primary Residence

If you haven’t bought your primary home yet then consider getting a multifamily and living in it as your first property.  You can still qualify for a traditional mortgage which has much better terms live in one of the units while renting out the rest.  Ideally you want your tenants to be paying the mortgage for you while you save what you would pay in rent to and use it to buy more properties or to pay down your existing mortgage quickly.

Tips for the New Real Estate Investor

Real estate can be a great way to make some money and build a future but to be successful you need to know what you are doing.  Real estate mistakes can be costly which is why so few are willing to dive in.  If you are looking to make your fortune in real estate there here are some tips for the new real estate investor to get you on the right path.

Find a Mentor

You need someone that you can regularly go to for help or guidance, but that can’t be just anybody that needs to be someone who is already successful in that field.  Successful real estate investors have a network of people around them, you will need to know contractors, realtors, accountant, attorneys and inspectors just to name a few.  In that circle find someone who will share with you what they have learned, you’re already ahead of the game if you can learn from someone else’s mistakes rather than making them yourself.

Find a Peer Group

There are plenty of organizations and groups for real estate investors, it’s a great place to learn and to network. If you live in a big enough city then you can probably attend a local meeting.  To find one you can check online at MeetUp or find a local REIA meeting on nationalreia.com.  These get togethers are a great place to come into contact with potential investors, real estate agents and other contact you are going to need in the industry.

Make a Plan

You need to set reasonable and achievable goals for both the short term and the long term.  For instance how many houses to you want to buy this year?  Do you want to buy and hold or buy and flip?  What do you want to be worth in the next 5 years?  Take the time to sit down and write out these goals then make the strategy for making them happen.  Break everything down into doable chunks so you know what to do today to reach your 5 year goals.

Buy Some Property

The best time to start is right now.  Having a solid plan in place is great but it is useless if you don’t actually take some action to make it happen.  Before you know it the 5 years will be up and you will still be in the same position.  You will learn more buy doing than by reading another book on real estate investing.