By Young Earner Editors
Jan 23, 2022
Although numerous people have made fortunes from investing in real estate and many preach how easy and safe it is, there are many things to consider before buying your own property. Real estate, like any other business, has loads of risks associated with it. Research, fees, loans, and taxes are all crucial when looking for a property to buy. This guide will help prepare you for investing in real estate in the United States.
Step 1: Down Payment
The first thing to consider is a down payment. You won't be able to invest in real estate without a considerable down payment. A down payment is a partial up-front payment usually paid in cash or cash equivalents. The minimum amount required for a conventional loan is typically a down payment of 3% in the United States. However, a 15-20% down payment is ideal. A larger up-front payment will give you a bigger safety net if planning to rent out the property. With a larger up-front payment, the smaller your monthly loan payments are going to be.
Step 2: Credit Score
A good credit score is critical to real estate investing as it will allow you to get the lowest interest rates on your loans. A credit score of about 740+ is preferred. If you are unsure what a credit score is, please read this. If you need help building a credit score, Graham Stephan is a great source, check out his video here.
Step 3: Talking to Lenders - Requirements
When a lender is considering lending you money they will need to look at your tax returns from the last two years. They will take your income from those two years and average them. Let's say your tax returns state that you earned $50K the first year and $100K the next. The lender will take the average of those two numbers which comes out to be $75K. That's how much they are willing to lend you. On top of tax returns be prepared to provide bank statements, proof of employment, proof of income, and proof of any other assets or liabilities.
Step 4: Start Looking For Opportunities
Assuming you have spoken to a lender and you know how much they are willing to lend you, you are now ready to start looking for a property to purchase. To get the best deal, focus on one neighborhood/area and try to see as many properties as you possibly can. If you plan to spend some money and time on renovations, look at properties 10-15% above your price range to get an idea of how much you might earn in rent per month after renovations. After inspecting a good amount of rental properties in your area, you will start getting a good idea of what renovations are common in the area and which ones are worth it.
Step 5: Where to Buy
Looking at rental properties close to your home is considered the best idea for many reasons. You are more aware of news, local improvement/investments, and updates in your local community. These things could shift prices very easily, giving you an advantage over other investors who aren't from your community. The biggest upside to investing locally is being able to see the properties you are buying with your own eyes and understanding what you are getting yourself into.
Step 6: What to Buy
When looking for your first property, it's a good idea to invest in a property slightly lower than the median price of your area. This way you are hitting the largest group of buyers in your market as it is a more affordable option for them. Buying slightly below the median price also allows for more upside through renovations. Lastly, to maximize upside and potential profits, invest in single-family homes, duplexes, or triplexes instead of condos. Condos include Homeowners Association (HOA) fees which can reduce your profits. Read more about HOA fees here.
Step 7: Analyzing the State of the Property
When buying properties you must analyze everything. It is preferred that roof, plumbing, electrical, foundation, mold problems have been taken care of recently. To make sure these things are in order, hire professionals to take a look at the property before finalizing a payment.
Step 8: Location
These things could devalue your property and reduce the likelihood of selling it in the future. Avoid buying properties close to the following:
Highways and busy streets
Commercial buildings (parking lots)
Step 9: Ownership Costs
You must consider the following ownership costs before buying a property:
How large is your down payment?
How high are your mortgage payments going to be? (Mortgage Calculator)
What are your loan interest rates going to be?
Renovations (Contractor costs)
Property taxes (List of State Property Taxes)
Miscellaneous expenses (plumber, electrician, pest control, etc.)
Vacancy (Renters moving in/out or simply not interested)
These are things that must be considered and compared to the estimated rent that you would be receiving.