A first-time property investor understandably goes through an emotional rollercoaster during the process of buying an investment property. The stakes are obviously higher with a low margin for error, especially because of the large sum of money usually involved in a property purchase.
Anyone who is undertaking a venture for the first time will usually have some doubts about what to do and how to go about doing it. They will, therefore, often have several questions about the venture they are looking to be involved with. The same can be said of anyone looking to invest in a real estate property for the first time.
In the real estate industry, nothing beats information or knowledge and you won’t know unless you ask. Oftentimes, what makes the difference between buying a dream property and losing a fortune are the questions you ask and don’t ask.
This article will provide a list of some of the frequently asked questions and answers that beginner investors in real estate often have about the investment that they are looking to make.
First-Time Property Investor FAQs & Answers
Do I need to talk to my bank before searching for properties?
Yes, you should, unless you have 100% of the needed cash. You don’t want to spend ample time scouring for your dream investment property only to discover that it is out of your financial reach. For a start, you will likely need a credit score of at least 680 to qualify for a bank loan, then you can go from there. Sellers and real estate agents will also take you more seriously if you walk in with a preapproved loan. They’ll know you aren’t just “looking” but that you can also sign a check. Also, by applying early you’d be able to complete all paperwork early enough to close a deal.
However, you should note that qualifying for high loan amounts should not be your priority. What should be more important is your ability to comfortably pay back the monthly mortgage. Ensure that your monthly mortgage repayment will leave you with enough financial room to accommodate other monthly property expenses.
How much do I need as a down payment?
We have previously stated that the best way to buy an investment property is with 100% cash. But if that’s not feasible for you, you may need to secure a mortgage. At the very least, you should ready a down payment of 10-20% of the investment property’s worth. A down payment of 20% or more excludes you from private mortgage insurance (PMI). PMI protects lenders against defaulters and is usually 0.5-1% of the total mortgage value. That is, if you borrow $400,000, your PMI might be $4000 per year or $333 per month. That’s another fee added to your mortgage payment each month. In summary, it pays to save up a down payment of at least 20% of the property’s worth rather than paying more interests and fees under a suffocating mortgage.
Do I need a real estate agent?
It may seem pretty easy. Browse the listings on a property website, select an investment property, contact the listing party, view the property and buy. But in reality, real estate agents or realtors offer a whole lot of experience, expertise and other value-adds that you won’t have and would need to secure a favorable deal. How good can you negotiate? How convincing is your poker face? How well can you independently verify the true value of a property? Real estate agents are trained professionals when it comes to all these things and more and they can often get you what you want or at least as close as possible.
Additionally, they are familiar with real estate documents so they can point out unfriendly terms, clauses, hidden fees, and other contingencies that you might probably skim over. In essence, you have nothing to lose and a lot to gain with an agent on your side. Investing in real estate without an agent won’t necessarily save you money. But it potentially will cost you some.
Why is the property up for sale?
This is one question you need to ask. Not only would it give you good insights on the seller, but it may also help you during negotiations. For example, a businessman might be hard-pressed for cash and wants the deal to close as quickly as possible because he needs the money to invest in a lucrative time-sensitive business deal. He would be considered a motivated seller. A homeowner on the other hand who inherited a property from a grandparent might be willing to wait as long as it takes until they get an offer that matches their asking price.
Therefore, knowing the why for wanting to sell the property can sometimes work in your favor. As expected, some sellers may not be willing to go into details. However, if you can get them to talk, you may be able to get a better deal. This, again, is something that a real estate agent is much more likely to be able to find out for you if you had them working for you.
What exactly is included in the sale?
To avoid disappointments when you finally close the deal on the investment property, you need to be sure of what exactly you are getting from the deal. To this end, it is a good idea to demand a fixtures and fittings form from the seller outlining all the inclusions and exclusions in the property. However, don’t be surprised if items you’d expect to be included in the sale aren’t. If you’d like for more items, you should negotiate with the seller before putting your offer in.
Do I need to inspect the investment property before sealing the deal?
Yes, you absolutely do. In fact, it is in your best interest to have a property inspection clause in the offer to purchase agreement. Although property owners often list defects in a disclosure form, their report may not be accurate. So, employing the services of a professional property inspector is very important. A set of professional eyes would accurately reveal the overall condition of the real estate investment property. Additionally, you may be able to secure immediate or future concessions on repairs and other contingencies before closing the deal. Also, you’d be able to pull out of the deal without penalty if the inspection reports too many critical issues with the property.
How important is an up to date certificate of occupancy (C of O)?
Very important! Any renovations carried out on a property that drastically alters the structure of the property may have rendered its C of O invalid if, for instance, the proper and updated permits were not obtained. Often, new construction or renovations to a property might require a new C of O after the project has been completed. It is quite usual that this updated C of O would not be obtained. So, it’s important to confirm if the C of O of the property you’re interested in is accurate and valid. You may use an expired or Temporary C of O as leverage in trying to negotiate a lower purchase price during negotiations. If the seller is facing difficulty getting the C of O, you should assess the severity of the situation. If fixable, a real estate lawyer can help you handle the necessary paperwork.
Do I need a real estate license as an investor?
It isn’t compulsory, so it is entirely up to you. However, a real estate license comes with its fair share of monetary and networking benefits. For example, when you buy a property from a Multiple Listing Service (MLS) listing you likely can end up saving anywhere between 3-6% of the purchase price that you otherwise might have paid to an agent. The same goes for if you were to sell your property via an MLS. Also, there is the information, data and other analytics that can be gotten from access to an MLS service that can turn out to be the difference between finding a good deal or a great one.
Related: How to Make Money in Real Estate with No License
Also, real estate can often be a ‘people business.’ In the process of getting your license, chances are you’ll meet other professionals in the industry. These relationships may be of help to you in your real estate investment one way or the other. You may be able to broker off-market deals even before other parties get a hang of it. However, there are two sides to every coin. While getting a real estate license has its benefits, it will likely cost you a great deal of time and money.
This article has been contributed by Kanayo Okwuraiwe.