When starting your real estate investment, it is not uncommon to be completely confused and clueless about how to start. You will have more questions than answers. The best investors become successful because they constantly ask questions. Therefore, we have compiled some of the common questions typically asked.
How should I start? I don’t have much money and I only make just enough to pay my bills!
Well, I can only tell you how I started! Just like you, I didn’t make much working 9:00 am to 5:00 pm. My first real estate investment was (I still own it today) a four unit apartment in Pennsylvania, PA. Each unit has 3 bedrooms each and the tenants paid their electric, heat and water. It was my first apartment and I lived in one of the apartment while in PA. Since it was my first real estate purchase I qualified for a FHA (Federal Housing Administration) loan; which means I don’t have to have much to put down for down payment on the loan.
The real estate industry is very broad so each individual starts differently. I started with very little money. Others start as a whole-seller, realtors while others with deep pockets choose real estate to diversify their investment portfolio.
With little money, starting with the FHA loan got me my way in. I don’t have the typical 20% down for commercial purchases and also needed to understand the bells and whistles about home repairs.
There are a number of options when it comes to financing your first real estate deal. You can always choose a conventional course of action by acquiring a loan from a traditional lender, i.e. big banking institutions. However, you can always opt for a private or hard money lender. Private lenders are less strict in regards to their loan requirements and therefore typically charge higher interest rates ( I will really not advice this route for new investors ).
Wholesaling is another viable option for investors who are just getting started because it requires no down payment or any of the investor’s personal capital. More often than not, new investors save up the profits they earn from wholesaling to use as down payment on a rehab or buy and hold property.
What DO I need to know as a first-time home buyer or investor?
Many aspiring real-estate investors are nervous to the point of paranoia when it comes to making a move on a purchase. It’s like wanting to be a professional swimmer “Michael Phelps” but you are scared of water because of your fear of drowning. Buying your first home can be scary and but once completed, invaluable.
First know you credit status! If you have a “not-so-good” credit, then start working on it now. Pull your credit (free online credit report ) and start working on the negatives. Pay your creditors or work out a payment plan with them and follow the recommendations made by the credit report to better your score. If you want to get into real estate, you need good credit. Well, except you have deep pockets and don’t need the banks.
The key step in becoming an investor is to get your finances in order. This is why it’s crucial to check your credit score in order to determine the overall state of your access to funds. If you are a first time buyer you will need to get pre-approved for a loan. If you are not a first time buyer and you are buying an investment property you will need to talk to a commercial banker about the bank’s requirements. Typically, commercial bankers will not give you a pre-approval letter. They will have you fill out an application form and provide your financial statement. This will give them insight on your credit worthiness. If all checks out they will evaluate your proposed investment property (the property you want to buy) to ensure it does generate sufficient income to cover expenses. Also you will need a 20% to 25% down payment.
Is There Any Tax Benefit That Comes With Investing In Real Estate?
The tax benefits that come with investing in real estate are endless. Becoming a rental property owner however, is arguably the easiest way to receive these benefits; but certainly not the only way. When you rent a property, you can deduct a number of expenses including, but not limited to, depreciation, repairs, interest and taxes that relate to the common property. There are other mouth-watering benefits to owning real-estate that will be touched on later.
How should I structure My real Estate Company?
The most common way to structure a real estate business is by forming an LLC (limited liability company). However, individuals can also opt for an S Corp or Sole Proprietorship. LLC’s are most universal in the real estate investing industry because it is a separate and distinct legal entity. Meaning that an LLC can obtain a tax identification number, open a bank account and do business, all under its own name. The primary advantage of an LLC is that its owners, known as members, have ‘limited liability,’ which signifies that , under most circumstances, they are not personally liable for the debts and liabilities of the LLC.
What’s my niche?
Real estate investing has the ability to turn employees into entrepreneurs, but not without dedication, hard work, and persistence. Yes Persistence! Real-estate is not a get rich-quick-scheme. It can be very slow and requires consistence on a specific niche area. Should you flip or rent? What kind of property should you buy? Commercial, retails, apartment, single-family house, mobile-home, land etc are all questions that you need to answer. Rome was’t built in a day so you have to start somewhere and expand from there.
When you flip a home, you buy it, fix it up, and resell it for an increased price (which is hopefully more than what you paid to spruce it up and your purchase price). This can be a quick business for professionals who can easily evaluate just what a home needs to appeal to buyers — and has the right connections and contractors to get the work done before too many mortgage payments are due. But repairs and remodeling can take more time or money than you expect, which can turn efforts to flip a house into a headache. Real estate pricing may change unexpectedly — another important reason to do your homework on the local market — which could leave you with a piece of property that’s suddenly worth less than what you paid for it.
If you buy a property to rent, however, you’re likely going to have similar challenges to make the place appealing to renters, but you aren’t under the same time constraint as if you were trying to flip the house. Because a rental property is a long-term investment, it’s fine if the property doesn’t immediately increase in value. However, renting means you’re a landlord and have to deal with ongoing maintenance of the property as well as managing tenants — or hiring a management company to do it for you. For starters I will advice you manage the property yourself! You gain knowledge and experience by doing so. Yes, understand that you are bound to make mistakes. Don’t be afraid of the waters if you want to swim!
Both of these methods have their pitfalls, but typically flipping is better for a quick payout — which you could apply to your next property or your retirement account — while renting is a good source of ongoing income. But note the higher the return; the higher the risk!
Before you buy, take some time to think about what kind of property you’re looking for. Do you want to work with single-family homes? Duplexes? Commercial property? When you’re considering, you’ll want to lean on your research to help you decide what’s in demand and what’s going up in value.
What is the best exit strategy for me?
The first step an individual must take after making the decision to leave his or her nine to five job in order to become a real estate entrepreneur, is what exit strategy to focus on. There are three basic exit strategies investors can choose to concentrate on, which include: wholesaling, rehabbing, and renting. Each has its owns benefits and disadvantages and is ultimately contingent upon an individual’s goals and preferences. For those looking to make cash fast, wholesaling is the ideal exit strategy as investors have the ability to close their deal in as little as two days. One of the most popular exit strategies, rehabbing, is perfect for those with an eye for design and the propensity for getting their hands dirty. If building long term wealth is your utmost objective, consider adding rental properties to your portfolio.