Investor Real Estate Tips: So You Are Considering Investing In Real Estate

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Investor Real Estate Tips

Just as you would have an emergency fund of 6 months or more if you were purchasing your first home, you need an even larger emergency fund when investing in Real Estate as an investment.

Many tout Real Estate as a get rich quick money machine. I have seen investors do exceedingly well without having a large monetary cushion, however it is more of an exception—and they usually had other compensating factors at work.

Most investors that I have worked with over the past 15 years have had a very strong cash position with not only a two year or more emergency fund in place—but also a well funded retirement plan that would (potentially) give them what they needed at retirement outside of their real estate investments—assuming modest returns in the investment world (stocks, mutual funds, bonds, money market fund etc.).

In short make sure your own financial house is in order, otherwise you may face a difficult and non-rewarding time as a real estate investor.

Again make sure your credit and credit score situation is known before you even consider contacting a mortgage lender. Have your down payment and closing costs in place before you contact a lender or real estate agent.

When you buy residential investment property, lenders factor in your income plus how much income the property will net. For example, if you have a mortgage on your primary residence, lenders want guarantees that you have enough income to cover both mortgages.

They may add 75% of the investment income from the rental property to your income to qualify the property (some lenders now use an even more stringent percentage).

Let’s say you earn $200,000 a year and are looking to buy a four-family home that brings in $80,000 per year. The lender will add $60,000 of the building revenues to your income to see if you can handle mortgage payments.

The next step is the financial analysis of the property.

The investment property may net you $80,000 annually under current market conditions, but you must project how much rent you could get under various market conditions.

An apartment in the building that goes for $2,400 today may only bring you $1,700 under less ideal market conditions.

The best way to make these predictions is to get the tenant history from the seller—the tenant turnover rate and payment history.

Be wary and use other independent sources as some sellers are known to manipulate their books. Also—are the taxes high, are you in a strong school district, is the neighborhood improving—or in decline?

Financial Institutions use projected rents from a real estate broker and/or an appraiser who will qualify the rental rates for a given property in a specific neighborhood (Due to the Real Estate meltdown they use even more rigid approaches to determine projected rental rates).

It is also wise to consider the type of tenants that you will attract and any expenses that will be incurred.  Is the property in a stable neighborhood?

What is the turnover rate—6 months, 12 months—2 years?

You may have to do repairs, paint, and replace carpet more frequently with a high tenant turnover. If renting to college students factor in a four month vacancy as school is in session for only eight months.

Also it is very important that you determine the type of return that you want on your investment prior to placing an offer on the property.

If you feel you can get 15% in the stock market with no active participation, you most certainly want to get at least that amount of potential income and appreciation if you are investing in real estate and actively managing the property(s).

Are you investing for income, appreciation, or a combination of the two. Assuming disaster was to occur could you carry the rental property and all of your other debt with your emergency fund.

If you answered no, now may not be the best time for you to start your real estate investing career.

Also, as with any real estate purchase—CASH IS KING, if in that position—you can negotiate more favorable real estate deals than those who will be relying on a mortgage lender.

About This Article:

 

The above article was written by Thomas (TJ) Underwood.   Thomas (TJ) Underwood is an active real estate broker in the state of Georgia and is the writer behind The Wealth Increaser, Home Buyer 411,  Home Seller 411, The 3 Step Structured Approach to Managing Your Finances, Managing & Improving Your Credit & Finances for this MILLENNIUM and CREDIT & FINANCE IMPROVEMENT MADE EASY—FREE GUIDE. 

He is the creator of TheWealthIncreaser.com where he regularly blogs about helping consumers improve their credit, finance and real estate pursuits in an intelligent, consistent and proactive manner.  He’s always looking for ways to make intelligent finance improvement happen for those who “sincerely desire” success in their future. 

You can contact him from a number of sources but the most direct way is to contact him through the contact us block that can be found at the bottom of this page. 

You can also get other highly relevant tips on "living your life more abundantly" and possibly earn revenue at the same time by linking to TheWealthIncreaser.com.

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