Great, now how do I actually INVEST in real estate?
Investing in real estate will get easier the more you do it. The first deal may take some time, but like anything, the more you do it the better you'll become. Here are some guidelines for investing in real estate.
Establish how much you can borrow:
Know your limits. Don't go looking for $400,000 houses when you can only afford a $200,000 house. Before you invest real estate you must know how much you can borrow from your lender. This can be anywhere from 80%-100%. If you are investing for the first time, banks will most likely only want to lend you 80%-90%. Once you've established good relations with the bank after five to ten deals, they will most likely be willing to cut you better deals and offer 100% financing.
Some private lenders may offer you mortgages and home equity loans of 100%-125%, be careful with these especially if they are individuals. Their motives are often only profit.
Most people dread seeing their banker, hoping that THEY will approve your loan application. However from my experience, you need to show the bank who's boss. By this I mean:
- Do not deal with only one bank, big mistake. Deal with lots of other banks and let the banks know about it. Send out your loan application to as many banks as you like. The best bank that comes back with the best deal wins.
- Always negotiate, just because the "Offered interest rate" is 6% does not mean that they will not lend you lower. Be persistent and confident if you are going to ask for a lower interest rate.
Other things to keep in mind before applying for a loan:
Don't lie, you'll get caught and be in a lot of trouble.
Try not to have bad credit history from now on.
Increase your income. Look into taking in foreign exchange students, take a second job, if you own a house with spare rooms consider renting them.
Try to eliminate liability payments. Or lower payments.
Another choice you must make is whether to make the loan an interest only one or a principal and interest loan. I generally prefer to take out interest only loans for several reasons. You will get more cash flow from a property if the payment is interest only. This can go straight to your pocket or cover and unexpected payments with the property. You will also be able to borrow more because you make smaller payments. You may also have the option of paying off the rest of the principal at a later time. Depending where you live, you might also get a tax advantage for taking out an interest only loan. Also, why would you want to pay off debt on something that is already putting money in your pocket and appreciating in value? Wouldn't the money be better spent on a deposit on another rental property which will give you more cash flow. I know I would rather owe 80% on thirty properties earning me $3,000 a year than two or three properties that I have no debt on.
Does this mean you can't take out a principal and interest loan? Of course not! If that's what you really want to do and you still make money on the property, go for it.
Asset protection:
A house will most likely be your biggest and most expensive asset, you'll certainly want to protect it. There are three ways you can do this. Physical protection, corporate protection, and insurance protection.
Physical protection is what you can change in the properties structure to protect it. So you could go as far as building a moat around the property! The first step would be to not buy a house in areas of high crime or natural disaster such as earthquakes or landslides. Then think about installing security systems, burglar alarms, and fences.
Having your property in a corporate entity such as a limited liability company, corporation, or trust provides legal security and possible tax breaks. This all depends on where you live, so it is important to look into this type of protection if you are thinking about buying a lot of properties.
Insurance is the third type of protection. Many insurance companies or even banks will give you good rates for insurance on an investment property. This is because they consider a house a very safe investment! You can get insured on all kinds of things, like earthquakes, depending on how much you want to pay. Be sure to find out the cost of insurance before you buy a property as well so you can input it into your budget calculations.
There is no I in team:
Before buying a property be sure to have good team. You will definitely need an accountant and a solicitor. It is important to have a team because you can't do everything, you need specialists. Everyone in your team should be passionate about what they do and know that you are passionate about what you are doing ( real estate investing!). People in your team must have experience in buying property! If you feel that anyone in your team is slack, inexperienced, and has questionable motives don't work with them anymore.
You may also find It of use to work with a real estate agent who is a property investor themselves. This can be good because If the agent invests in property he or she will have a good idea of what your looking for. However make sure you know the agent's motives. If they are a property investor themselves, why wouldn't they buy the property?
Next, Learn how to analyse a deal in Part 4.
This article was written by John Whiteside. The original article can be found here http://www.use-your-equity.com/realestateinvesting.html . Use-Your-Equity can show you how to create value in your home, then show you how to use the newly created equity to make money. http://www.use-your-equity.com for more information.