You’ve thought about it for years, admiring others’ success. You want your piece of the pie. You’re ready to invest in real estate.The rewards can be substantial, but they come with challenges. Below are major hurdles faced by first-time investors.
Determining if a property will be a good investment requires careful research and consideration. As you review options, ask questions. If the property is vacant, ask why? Has it been mismanaged, and can you correct the situation? Is there no demand? Are there hidden building problems? If tenants are in place, are they solid? What’s their payment history? Do they have reasonable expectations of the landlord? How long will they stay? You need to do serious homework here. Interview the seller and property managers involved, and speak with tenants. Review leases and financial reports. Inspect the building, and hire a professional unless you really know your stuff. Drive around the neighborhood to judge quality, and note the number of “for sale” and “for rent” signs. Answer these questions carefully before you buy, and your first property just might be one you’ll want to hold for years.
Most lenders require 20-30% equity before they’ll provide financing. Equity helps you too, reducing financing costs and helping achieve positive cash flow. Equity reduces the risk of getting “upside down” (owing more than the property is worth) and is a head start toward building ownership value. Coming up with adequate equity for your first investment can be a challenge, so have a plan in place to fund equity, whether through cash savings, other assets like stocks and bonds, or equity you can pledge from other real estate.
Most likely, you’re going to need a partner. For many, that means finding a bank, credit union or other institution willing to work with investors. Following the financial crisis of 2008, that can be a challenge. Many institutions have reduced or eliminated investment real estate lending, so be prepared to contact a number of institutions. Find willing lenders and interview them on credit policies, loan terms and rates. Look for flexible terms with reasonable rate lock periods and amortization schedules. Variable rates kill, so look for fixed rates of at least 5-10 years or longer. Request longer amortizations with reduced monthly payments. Some lenders may allow 25 or even 30 years. Avoid pre-payment penalties. Smart investors pay loans down more quickly than required, but benefit from payment flexibility that long amortization allows when cash flow is tight.
Proof of Payment
Lenders focus on cash flow from your new property and all other sources to document ability to repay. That can be a challenge, especially for investors and business owners who face the competing priorities of limiting taxes (by recognizing as many expenses as possible) while demonstrating cash flow to service debt. Always maintain detailed financial records, and accurately record expenses to ensure that your financial statements and tax returns reflect cash flow you have available.
Investing in real estate can be rewarding, but those rewards come with challenges. As you plan your first real estate investment, think about the right property, the right equity, the right financial partner and the right cash flow so your first investment will be a good one.