A new home purchase is one of the biggest investments you will ever make. Anyone even remotely associated with the real estate world has heard this cliché many times before. While it is often overused, there is plenty of truth to support it, and even substantiate it. Having said that, relatively new investors may be hesitant to move forward with a purchase because they are scared, or even lack the knowledge to proceed. However, I can assure you it is worth taking the leap. Done correctly, investing in real estate can lead to a very lucrative career. If you are looking to buy an investment property, here are a few steps you need to get started:
1. Line up financing: The first step that all buyers need to take is to get financing lined up. If you are looking to finance the property through a bank or mortgage broker, you need to get pre-approved. This is done by reviewing your credit score, income and down payment. Investment properties have stricter guidelines and require an additional down payment amount. Many investors also seek financing through private or hard money lenders. These lenders do not follow traditional lender guidelines, instead they look at the physical property and potential returns it can generate. Going this route eliminates most of the red tape associated with lender financing, but comes with increased fees and higher rates. In return, you have the ability to close quicker and can often close more deals throughout the course of a year. Either way you go, you need to have financing in place before you do anything else.
2. Find the right real estate agent: There are many good real estate agents out there. The key for an investor is to find one that knows what an investor wants. A property that may be great for a primary residence may not be the best fit for an investor. A good real estate agent is responsive and knows that working with you may require additional work. You may need to see properties that are time sensitive and make offers on many more deals. Not every real estate agent wants to work with an investor. You should treat your search like you would for anyone else on your team. Ask them questions until you are confident that they are a good fit for what you are trying to do. Experience helps, but is not always a necessity. Experienced agents often have many things going on, and you may not be able to reach them when you need to. It is more important to find a real estate agent that gets what you are looking to do and is willing to help you get there.
3. Run the numbers: With a primary residence, you need to look at the PITI (principal, interest, taxes and insurance) to see if you can afford the property. PITI is still relevant with investment properties, but there are a slew of additional numbers you need to know. Depending on if you are looking to use the property for a rental or rehab, you need to know all monthly expenses, carrying costs, materials, labor, and much more. The numbers are the backbone of every deal. In fact, I could argue that the numbers are more important than the physical property. You need to know that the numbers you are using are reliable, accurate and up to date. Buying a property with different numbers than you project will completely impact your bottom line. Numbers hold the key to every investment purchase.
4. Make an offer: Not every deal you pursue will be perfect. There will be times when things look good, but you still remain on the fence. The only properties you will purchase are the ones you make an offer on. If the numbers make sense and the rest of the due diligence checks out, you need to take a leap of faith. Many new investors think that their lowball offer will get accepted. Don’t just make an offer, make the right offer. Listen to your real estate agent on what the market is doing, and where you should come in at. Your goal is to get the property under contract, and not just submit an offer. The real estate business is a numbers game. The more offers you make, the more properties you will own.
5. Insurance/Appraisal: Once your offer is accepted, you have a small window to get the house inspected. Unless you are tearing the property down or doing a full rehab, you need to have an inspection. The inspection is done for your benefit. They will inform you of any flaws and potential problems with the property. If you are comfortable enough with them, you can move forward. The appraisal, on the other hand, is a given if you use bank financing. This is done for them to verify the value of the property. With the changing landscape of the housing market, the appraisal is a big hurdle to get past. You can still proceed if the value is less than the purchase price, but you would need to either lower the purchase price or bring the difference to closing.
6. Close: Closing a real estate transaction is much more about the attorneys than you. Once things get to closing, all you need to do is show up with a check and be ready to sign. You will know a few days in advance how much you need to bring, where and when you need to show up. You will sign dozens of papers, but when you get through it you are done and can walk away with the keys. Then the real fun starts.
The purchase process may seem intimidating, but it doesn’t need to be. Follow these steps and you will be well on your way to getting your first property in no time.