The number one obstacle that every beginner real estate investor deals with is finances. In fact, that is the factor that keeps many from buying an investment property.
If you are stuck in this type of dilemma, this blog is what you need. After reading this article, we guarantee you’ll know exactly how to start your own business in real estate with your finances in order. So, let the journey begin!
#1. Your Debts
If you really want to know how to get your finances in order before buying an investment property, you need to look at your debts first. So many people have mortgages, credit card payments, student loans and so on. Taking care of these first is what makes the most sense for you.
Take the time to start writing down what debts you have in detail. For example, you might have a student loan of $5,000 and $2,000 in credit card payments. Maybe you owe your neighbor $500 as well. Write it all down and add up the total value of your current debt.
The next step you want to do is to write down all the income streams you have. In short, how much do you earn per month? Subtract the total debt from the total income and analyze how much it consumes from it.
Now, why is that important?
When you apply for an investment property financing program, that is the first thing a mortgage lender will look at. Lenders will calculate the rate of payment-to-income and would like to see that your debt payments consume only up to 45% of your income. This is the perfect ratio for a mortgage approval. Otherwise, you will really need to work it out through a budget which will take some time.
Related: How Do Investors Make Money in Real Estate if They’re Always Spending and in Debt?
#2. Your Credit Score
Your credit score is another aspect you want to look into. All lending companies look at your credit score. However, many will only consider lending you the money if you have a score of no less than 600.
For the purpose of buying an investment property, you really want to work on improving your credit score. If it’s 600+, then great for you. It will enable you to apply for almost all types of investment property financing programs. But, when it comes to bad credit, getting a loan will not be as easy.
In this case, we’ve got two solutions for you: 1) You work on repairing your credit ahead of time, 2) You could use the services of credit repair companies. This, of course, will cost money. But, hey, you’ve got to get your credit score in shape to qualify for financing!
#3. The Down Payment
The down payment for buying an investment property varies based on the state/city you want to operate in. Some lenders will ask you to provide a 20% down payment. Though there are loans that require less, we think it is best if you could provide the 20%. The reason for this is equity. Equity is basically what you own on the property. For example, if you buy a rental property that is worth $100,000 with a down payment of $20,000, then you own the $20,000 share. While if you paid $10,000, it means that you own less on the property. Therefore, equity plays a great role in your business as a real estate investor.
Related: What You Need to Know About the Minimum Down Payment for Investment Property
#4. The Closing Costs
As a house investor, there is no way to proceed with buying an investment property without taking into account the closing costs. As a matter of fact, this is something you really want to include in your budget worksheet. A real estate investor can expect to pay up to 2.5% of the total purchase price on closing costs. Therefore, your budget must include it as the days of seller’s credit are gone. After all, it comes down to having an approach to some cash, thus, making the next section a crucial factor for having access to cash.
#5. Setting Up a Budget
Buying an investment property means that you must learn how to manage your money. Moreover, to reach the financial status you want to buy the property, you need to start by setting up a budget. Get yourself a monthly budget planner. It does not have to be fancy as you could use a notebook or even download an app on your phone. This will help you set a monthly budget and, most importantly, stick to it.
By recording your income as well as daily expenses, you can get an idea of where your money goes. Furthermore, you will start to notice all the useless stuff you’ve been wasting money on. Using the monthly budget planner will also help you estimate the amount of money you can afford to save. So, start budgeting early on so that by the time you are finally planning on buying an investment property, you are not in a financial bind. Rather, you’ll come to notice that you were able to get your finances in order only by tracking your expenses. This will allow you to save up for the down payment as well as the closing costs. You might also be able to save some money to pay your bills until your property starts to generate some positive cash flow for you.
#6. Due Diligence Before Buying an Investment Property
The one mistake that many people make, which makes real estate investing for beginners hard, is that they only budget before buying an investment property. They neglect the fact that budgeting is an “after process” as well as a “before process.” The most successful real estate investors are the only ones who got this rule and stuck to it.
Budgeting also means that you analyze the opportunity of making money in real estate. The only way to do it, though, is by performing proper investment property analysis. This takes us back to the rule that you make money when buying an investment property and not only when you make a profit. The reason behind this is that making money starts by analyzing the potential of the property, therefore, making the investment property analysis process a must.
Simply put, this type of property analysis enables a real estate investor to estimate the potential rental income and rental expenses to check how much to expect in cash flow. The cash flow is the money you’ll be left with as the profit. Another advantage of this process is the ability to grow your real estate investment portfolio in a very short time if you do it the right way. Thus, becoming rich will be a given in your situation.
Related: What Are the Most Important Metrics in Real Estate Investment Property Analysis?
To help you perform these calculations, check out Mashvisor’s investment property calculator. It will save you the time and effort to do them manually. You can do so by clicking here and subscribing to our website.