I get a lot of calls from clients who are interested in purchasing real estate as an investment, but don’t know where to start. One of the first things to consider is how you will finance this investment. There are many financing options available including a traditional lender, i.e. Wells Fargo or Bank of America, a hardmoney lenders like Bay Mountain Capital, and private lenders just to name a few. It is not as easy as it once was to get traditional financing. Most institutions will require at least 20% down and want to see a 750 credit score or higher. In addition, the traditional lender will not look at potential rental income. As a result, you will have to qualify for this investment as if it was not generating any income at all.
Many investors choose to use a hardmoney lender to finance the acquisition and rehab of the investment and then go on to re-finance the property down the road. This avenue costs more money, but re-financing a property that is already generating income eliminates the need to qualify all on your own income (without considering rent).
My favorite way to purchase rental property is through private money. I have found that there are many people out there who want to diversify their wealth and be a part of real estate, but don’t necessarily want the head ache of dealing with renters and collecting rent. For private lenders, they are happy to make 6-10% inerest because its a lot better than the alternative of .5% in the bank. Finding private lenders, however, is not easy as they don’t exactly put an ad out in the paper.
The next thing to consider are your financial goals in regards to a particular investment property. Do you want a property strictly for cash flow or do you want a property strictly for equity increase or do you want a combination of both? Most people want a combination of both. Knowing the keys to a profitable rental property is important!
You may be struggling with how much you should pay for an investment property. Most investors will not pay over 85-90 times rent. So in order to know what kind of deal you are getting, you need a good relationship with a Realtor so they can help you with what the rent rates are. For example, if a home will rent for $1200 a month, then an investor shouldn’t pay more than $1200 (rent) times 85 equals $102,000 for the house. $102,000 is the TOTAL investment which includes closing costs, any rehab costs and leasing fees.
I recently came across a great investment calculator on the AARP website. It will help you look at an investment and understand the total return you possibly could make, it evaluates cap rates, possible equity increase and everything else you could think of. Investor Caluclator.
Investing in Real Estate is a great way to take advantage of a depressed real estate market along with low interest rates, both of which we may not see again for 40-50 years!
Take a look at this interesting video to learn about Tips on Being a Landlord.