How Much Money To Invest in Real Estate

Are you thinking of investing money in real estates without any hassle like qualification and mortgage payment? Paying money for a house might sound a little intimidating if you are new to this. Nowadays, buying a real estate and selling it afterwards isn’t the only way to invest money in real estates. You can buy a rental property that can help you make decent money if done the right way! Let’s have a realistic look at what will you expect to have in terms of money. 

The purchase price of a real estate

If you are aiming to buy a rental property, keep in mind that you are not choosing a house for your own benefit. A good rule of thumb when choosing a property to invest in is, staying away from a property with low price. If the property is available is affordable at an unbelievably cheap price, the chance is it has problems. If you end up giving a thought about the “affordable” property, do run a thorough check to figure out why you are getting a property so cheap.

However, not every cheap property is bad. In fact, if you have found an affordable house which needs a few repairments to be done, consider taking it up. It is all ways better to own a few small houses than investing all your money in a big one. This lowers the market risk and makes it easier for you to sell

 3 tips about property prices

1. Buying around the median price

Finding out a median price is fairly easy. Seek help from a realtor or check the list of homes that have been sold recently. While you go through the price from the least to most expensive, you will find the median price. The medium price that falls in the list is the median price. Set your initial price at 25-50%.  Any lower than 50% is a no-no as these areas are most labelled as crime-zones. Any higher than 25% over the median and your mortgage payment would soar high, making your cash flow negative.

2. Run an analysis of your property

Once you have found out a suitable property, the next step is to run a real estate analysis. In short, this means getting to know more about the property. Compare the overall property by finding out similar properties in the area that are sold for over the past several months. Once you have identified similar properties, compare their selling prices. This should give you an idea of what should you be paying before you start the negotiation process.

3. Negotiate

This is not rocket science! Most of the times people forget to negotiate and buy whatever they are charged. It’s always better to negotiate the price as this can increase the chance to get a fair share of price-off from the marked price. Many people fail to reap this benefit because they don’t see a point in negotiating. Now, if you do try to negotiate, make sure you know the fact and statistics. 

Saving the downpayment

For property purchase, the less money you spend on a property, the better. For mortgage, the more leverage you have while borrowing for an investment, the less cash out of pocket is needed and hence you get more cash return. Keep the amount of the payment a little higher per month, but first making sure that your rental income covers the amount. This helps you to repeat the process and generate twice the benefits of property ownership.

ROI is important because the sooner you get your investment back, the faster you can buy another house, pay-off the mortgage or live off the cash flow. Some people choose the lower payment but that would mean tying up all their cash in one house which can prove to be a massive failure if things aren’t right. Putting money on more than one property is sensible as I have described earlier. You do it by house hacking. House hacking means getting an owner-occupied loan instead of a loan meant for real estate investors. That way you can save quite a lot of money.

Repairing and maintenance

And you thought buying the rental property will be the end of your cash requirements? When you buy a property, you need to think about the initial work needed to get the property rentable and the average annual maintenance costs.

First things first, you need to factor in a repair budget for items like paint carpet, cabinets, doors, floors, appliances and other utilities to repair and make the house look nice. You don’t need to make the house look brand new or something, just repair the basic but significant things in the house. You may also need to have cash for holding costs on hand which means you have enough cash at hand to pay the mortgage, taxes and property insurance for a few months while you're fixing the property.

Secondly, be aware of the general maintenance costs. Some things you will need to pay for every year, like cleaning the gutters, fixing the pipes etc. It’s always better to keep an amount in your hands to fix them in case you need in an emergency. 

Saving reserves

It is also important to keep in mind about the vacancy and other unexpected costs when buying a rental property. If you are going to replace the tenants, you have to pay the mortgage and spend money on paint and other items to get the house ready for a new tenant. While you can’t escape every situation it’s better to have a back-up plan. Saving some reserves thus will help you in this situation. But keep in mind once you spend your money inside the house, there is no way you can get that back.

How much to spend?

So, let’s calculate a rough amount and break down things for your ease.

Down payment – House hacking with an FHA loan 3.5%, regular investor loan 10%

Closing costs – Generally 3.5% of the purchase price

Reserves – 6 months of mortgage payments. 

Now, that you know the estimation on buying your first real estate, you should be able to add or cut the budget according to your capability.

Originally posted in Paperfree.com