"Real estate is still the best investment you can make today," according to an interview CNBC recently conducted with nine advisors in The Oracles. With the economy looking secure and the real estate market vibrant and healthy, many are looking to add real estate to their investment portfolios. Are you? If you are new to property investment, your biggest question is probably, "How do I get financing?" Let's consider five tips to get you started building wealth through real estate.
1. Consider buying as an owner occupant.
Banks usually require 20 percent down to obtain a conventional loan as an investor. However, buying an owner-occupied property, meaning you are going to live there, greatly reduces the cash you need for a down payment. You can get in for as little as five percent down or even 3.5 percent if you qualify for an FHA loan. This is often a very feasible option for first-time investors. You'll need to verify with your bank, but most lenders require you to live on the property for only a year before renting it out. After the first year, you can move on to your next investment property.
2. Maintain good credit and reduce debt.
To secure financing, you'll need to appear financially healthy. Your credit score is the single-most-important factor that affects your loan terms. Your score needs to be above 740 to qualify for a low interest rate. Secondly, lenders will look at your debt-to-income ratio (DTI). Calculate your DTI by dividing your recurring monthly debt by your gross monthly income. Thirty-six percent or lower is preferable, with 43 percent generally being the highest a bank will accept to qualify you for a mortgage.
3. Take advantage of your current home.
If you already own a home, you could tap into its credit either through a home equity line or a cash-out refinance to purchase the investment property outright or to come up with the cash for a down payment. Many lenders will allow you to borrow up to 80 to 90 percent of your home's total equity.
4. Look for properties offering owner-financing.
If the seller does not have a mortgage on the property, they can offer to sell it and finance it themselves. Essentially, the seller is the bank. You get the title, but they hold the mortgage note and deed. You make monthly payments, both principal and interest, just as you would to a bank. Sellers often like this option if they do not need all the cash from their property right away because they often make more in the long run through interest on the loan. It's advantageous for buyers who may not be able to qualify for traditional bank financing.
5. Look at a fixer-upper.
Did you know you can get special financing when you buy a fixer-upper? While it's a seller's market, there are still deals to be found, and many of them are homes in need of repairs. Consider applying for an FHA 203K loan, a loan that will cover the price of the home plus the cost of needed repairs. The biggest perk is this loan's low down payment of around 3.5 percent. FHA does require you to purchase as an owner occupant. So, you'll need to live there for a set period before you can start renting it out.
Investment is about risk versus reward. How much risk is worth the potential reward? What will your current financial health allow? Can you push your limits? Unlike the stock market, real estate is an investment that can't disappear overnight. It's an investment with excellent return rates and great tax advantages. Start looking for your next investment property. Happy hunting!
