Real Estate Investing 101: How to Become a Real Estate Investor
If you had talked to someone involved in real estate between 2000 and 2007, you probably would have heard about how incredible and lucrative it was. The market was always on the rise. Prices were going up, so properties were selling at serious profit.
And then the market crashed. You don’t need to know how to be a real estate investor to know that a market crash is not a good thing.
Here we are, nine years later, and the market has had plenty of time to level out again. People everywhere are learning how to become real estate investors.
New rules were passed in 2014 in an effort to prevent anything like the real estate crash of 2007 from happening again. These securities are better for the health of the market, but they could make things a little more challenging for investors like you.
How to Get Into Real Estate Investing
Whether you’re researching how to be a real estate investor or just looking for real estate advice, this article will point you in the right direction.
Which brings us to our discussion of how to become a real estate investor. There are many ways to invest in properties and earn from it. Real estate investing 101 gives you the obvious ones: investing in properties to flip and investing in properties to rent out.
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This works for residential properties and for commercial properties. Typically, when you’re first learning how to get into real estate investing, it is easier to start with residential properties.
The focus of this guide to real estate investing will center on residential properties.
Primarily it will discuss the basics of real estate investing with the intent of renting properties out. It is easy to learn how to become a real estate investor; in application, the process is much harder.
(Real Estate Investing 101) Getting Started: How To Become A Real Estate Investor
First things first. With any life goals, it is important to map out your trajectory.
Getting a plan on paper has been shown time and again to improve your odds of actually reaching those goals. In the case of investing in real estate, projecting into the future might look something like this:
- The timeline in which you will invest in your first house
- The amount of money you will invest in your first house
- The timeframe in which you will have that house ready to rent
- The amount of money you need to make (i.e. monthly or yearly) from investing
- How much you’d like to make in three years
- How much you’d like to make in five years
- The number of properties you’d like to own
You might not have the answers to all of these at the very beginning, when you only know the basics of real estate investing.
Use your best guest. At the very least, you can look back on your initial numbers and see them as a sign of how far you’ve come: “I had expected to make $1,000 a month by the end of the first year, and I wanted to have two properties.”
You might find, after graduating from real estate investing 101, that you’re making $3,500 a month with three properties with another investment property in the pipeline. Those are hypothetical figures, but as you figure out how to be a real estate investor, you might surprise yourself with your growth.
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Initial Preparation: How To Become A Real Estate Investor
After you have a clearer picture of the goals you’re looking to hit, it’s time to make sure you have everything in order. This might seem obvious, but any guide to real estate investing would be remiss if it didn’t mention debt.
Excessive debt is something you need to pay down before investing. Lenders will look at your debt-to-income ratios when they’re determining your eligibility. To put yourself in the best position, minimize your debt.
Another important concept on the list of real estate investment tips deals with your credit. You’ll need to check your credit score. Your credit score has an even greater impact on your lending opportunities after the 2014 law changes.
The lower your score, the higher your interest rate will be. It’s also possible that your score will be too low to warrant a loan at all. Having a score below 500, for example, will make it very challenging for you to secure a loan — especially an FHA loan.
A great way to determine your credit score is through Credit Karma. They provide your credit score for free. They also outline in which credit building sectors you could make improvements to raise your score.
Sorting these elements, debt and credit score, are important early steps in how to become a real estate investor.
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Finding a Location
A key part of investing is choosing an ideal market in which to invest. This doesn’t need to be a market that’s close to where you live.
Close proximity might seem like a strong move in case your tenants have issues or need repairs made, but keep in mind that the house will be newly renovated. Everything will have been freshly repaired. You likely have a few years of issue-free renting before your attention will be needed.
There are ways around distance, and there is a more important element to consider: market saturation.
Here’s more real estate investing 101: If the supply of competitive rental houses is high, you will have to reduce your prices to compete.
Find People with Experience
There are people who have been investing in properties for years. There are also real estate agents who have been helping property investors invest in properties for years.
These are the people you want to meet up with and talk to; they will have the best real estate advice. They are the people with whom you want to build relationships, and they’ll know all the current real estate investment tips. There are a few ways to seek these people out:
- Find a real estate club in your area or a neighboring area
- Check on networking sites like meetup.com for like-minded groups
- Scan online forums or follow up on word of mouth leads
The benefit of tapping into these resources is obvious. When it comes to investing, you aren’t trying to reinvent the wheel. The methods out there are already working. While you understand the basics of real estate investing, these people understand the more nuanced market trends. They can turn you on to good leads or let you know when to be wary.
Assembling a Team
Aside from building relationships with investors and real estate agents with investing experience, there are a number of other people you’ll want to build connections with:
- General contractors
- Real estate attorneys
- Mortgage lenders
The key here is to find people with experience in investing. Building a knowledgeable team is important, and not just for their real estate advice. Experienced general contractors will have a good idea about what kinds of repairs or renovations need to be performed. They’ll also be able to tell you how much these repairs should cost.
Appraisers will be able to discern how much a property is actually worth. Real estate attorneys will make sure your interests as the investor are looked after. And mortgage lenders will provide you with the funds you need to acquire properties. Having a reliable team of experts that you call on consistently will make the investment process much easier for you, and it’s an important step in regards to how to become a real estate investor. The relationships you build will expedite the investing process, and it will put you in the best place to succeed with your investing.
How do you find these professionals? It’s time again to turn to the help of other investors and the internet. You might be able to find some of these people actually attending the real estate club meetings; otherwise, you can ask the other investors at the meetings. A quick web search will produce some local results for you. You have the option of using whoever you want, so take your time with the process and meet with different people in each position before making your decision.
Loans and Financing
The Federal Housing Administration offers insurance for loans. An FHA loan isn’t a loan given by the FHA; it’s simply insured by the FHA. Basically, it protects lenders from losses if a borrower (that’s you) defaults. Lenders typically offer the most attractive interest rates for FHA loans, because of the insurance. FHA loans will be affected by credit scores. As stated earlier, a credit score below 500 could mean ineligibility for the loan.
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The 2014 rules led to changes in high-end loan caps for many states. This means that hundreds of thousands of dollars less could be available to you through FHA loans. Consequently, you will have to put up more cash to accommodate the high-end cap. This is mostly for premium properties. Chances are, especially as you’re starting out, you’ll go for a more reasonably priced property. For those, provided your credit score is in a good place, you should have no problem getting an FHA loan.
To get an FHA loan, you’ll need an FHA-approved lender. With different lenders, the costs for the loan could change, even if the loan is the same. Different lenders have different costs, services, and underwriting standards, which leads to the price variance.
You can also get renovation loans, like the 203(k). This loan lets you borrow cash for nonstructural repairs:
- Replacing cabinets
- Installing new light fixtures
- Adjusting countertop floor plan
The final benefit of an FHA loan, which you’ll hopefully never have to use, is the help the federal government provides if you have trouble paying back your loan. The FHA has several options to help you while you’re in a tight spot:
- Payback time period extension
- Interest rate reductions
Play it Smart
Whether you are looking to rent or flip, there are a number of intelligent choices you should make throughout the process. It’s okay to hope for the best-case scenario (i.e., a quick flip or an immediate renter). But make sure to plan for situations outside of your expectations. What does this mean?
In the case of house flipping, make sure you are prepared to hold the property for a long time. Even if you were able to quickly close on a home-buying deal when you purchased the house does not mean a prospective buyer will have the same easy time of it. Strong real estate advice will tell you to plan on being flexible. Allocate your assets so that you’re able to pay the mortgage, and other costs, on your properties for months rather than weeks.
In that same vein, don’t use all your assets to invest in properties at the same time. If you aren’t able to flip a house or find a tenant, you need the funds available to pay for that. If all your capital is tied up in properties, you will be in a tough spot.
If you were renting in a perfect world, you would find a great tenant immediately, and nothing would ever need to be fixed. Here’s what can happen in the real world:
- It could take a while to find a tenant, leaving your property empty for months
- High-supply market means you might be forced to rent at a deficit
- Some tenants, by design or misfortune, will not pay their rent
- Expensive repairs on a home could wipe out severals months’ profit (or more)
As you learn how to become a real estate investor, it’s important to be aware of the fact that you can’t control these things. The basics of real estate investing teach that you budget for these variables accordingly. It’s worthwhile to invest in houses and properties that will appreciate in value over time.
Real Estate Investing 101: The Wrap Up
It’s natural to experience some trepidation as you go about investing in your first property. As you continue to research and meet people, you will get a better sense of what to expect as you go about investing. You’ll pick up the best real estate investment tips. The internet is full of great information (as you know, since you’re here). Use it. Find local real estate groups. Meet with general contractors, real estate agents, and attorneys until you find someone you’re comfortable with. Research the market into which you’re looking to enter. Remember that you’re not reinventing the wheel. Instead, you’re putting the wheels to work and pounding the pavement. The harder you work, the more you’ll reap from your investing endeavour.
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