It can be difficult to find accurate information regarding investment properties for beginners. While some resources make the claim that this is a sure-fire method to make money, others caution against getting involved in this type of investment at all.
Wency Estrera, Mortgage Expert and Senior Mortgage Consultant, explains what you need to know about starting out with investing in property.
What attracts people to investing in property?
I believe the primary motivating factor is building wealth. Historically speaking, investing in real estate is a tried-and-true method for wealth-building. Unless you've been hiding under a rock, you know that prices for single family homes have taken a huge downturn in the past few years. This presents a tremendous buying opportunity for those who are qualified and willing.
Is it easy to make money from this type of investment?
"Easy" is a relative term! Some people enjoy the time and effort it takes to become a successful real estate investor. Others do not. It takes countless hours of education, dedication and hard work. For some, it's almost like taking on another job. Having worked with numerous real estate investors over the years, I don't think I've come across anyone who said it was easy!
What is the first step for investment properties for beginners?
The first step is to get educated. Attend classes. Most mortgage brokers and realtors offer free investment seminars. It's a good place to start. These classes cover the basics of real estate investment, and allow you to meet with professionals in the industry.
Join real estate investment organizations and clubs so you can network with other investors. Most of these organizations meet on a monthly basis and offer lots of information and advice. Also, these organizations tend to have experienced members who can share their expertise.
What are the differences between investing in rental property and flipping houses?
With rental properties, the strategy is buy and hold. The typical holding period should be 5 years or longer. Ideally, the rental properties will cash flow, which means that the rental income covers the mortgage, property tax, and insurance payments. This allows the investor to maintain the property with very little out-of-pocket expense. Over time, the properties should increase in value. This is where true real estate wealth lies: property value appreciation.
Flippers, on the other hand, buy, fix-up, then try to sell immediately. The typical holding period for the flipper is 6 to 9 months depending on how much work needs to be done and how fast a buyer can be found. Flipping has been glorified on various TV shows, and gives the impression that anyone can do it. Nothing could be further from the truth. Flipping is something for seasoned real estate investors and not first-time investors.
How can beginning investors protect their finances?
The best way to protect their finances is by not overspending. Stay within your budget. Don't buy more house than you can afford. Don't go overboard in renovating the property. Always keep some money in a reserve account, such as a money market account. A good rule of thumb is to have 6 months worth of mortgage payments in reserve for each investment property owned. That will help the investor should there be tenant vacancies or repairs that need to be made.
What kind of person makes an ideal investor in property?
From an idealistic standpoint, it's someone who:
- Is willing and able to put in the time and effort
- Is not afraid to work
- Has patience
- Has the desire to learn
From a financial standpoint, it's someone who has the income and assets necessary to complete the transaction. A combination of the two would be ideal!
Some of the most successful investors I know started out with little knowledge and little money. But they had plenty of desire. So if someone is lacking in knowledge and money, don't let that be a deterrent. Where there's a will, there's a way.
Who should not invest in property?
The faint of heart! Those who don't have an investment plan. Those who are undisciplined. Those who don't have sufficient income and assets. Those who expect to make a lot of money overnight. It's unrealistic to expect that a property purchased today will double in value over the next 5 years. As we've seen, property values go up and down. It's the down times that test your resolve.
If you have a sound investment plan in place, you can ride out the bumps in the road. In real estate investing, as in life, slow and steady wins the race. Success will come with time.
Is obtaining financing for real estate investments easy?
Financing has definitely gotten more challenging. Gone are the days of the "stated income" or "liar" loans, as they've come to be known, and that's a good thing. Nowadays, in order for you to get a loan, you actually have to be qualified. By qualified, I mean having sufficient income and assets to qualify for the loan, as well as good credit. Good credit would be a score of 680 and above. Most lenders also require at least a 20% down payment. First-time investors who lack the capital find this to be the biggest stumbling block.
What tips do you have for people investing in real estate for the first time?
Be realistic. There are so many TV shows and get-rich-quick in real estate courses out there. Becoming a successful real estate investor takes time and patience. If you have the desire and willingness to learn and work, you can be successful.
Just like any business venture, educate yourself before jumping in. Learn from other investors. The more you know, the better prepared you will be. Also, make sure you work with reputable people.This is where networking with other investors will help. They can refer you to someone with whom they've worked and can recommend.
About Wency Estrera
Wency Estrera has been in the mortgage industry for 15 years and has lived through the ups-and-downs of the market. He is currently a Senior Mortgage Consultant with Smith-Craine Financial.