Thinking of investing in real estate?
Even with mortgage rates and buying costs on the rise, real estate investing can be a lucrative venture. But before you dive in, you need to figure out if it makes sense for you.
Do you have a timeline with an exit strategy? How much capital do you have and how much will you need? How high does your cash flow have to be to make it worth the squeeze?
These are the types of things you should ask yourself before buying a property, according to mortgage expert Shivani Peterson. You can hear the full extent of Peterson’s advice on a recent episode of The Mortgage Reports Podcast. Here’s what she said.
Listen to Shivani on The Mortgage Reports Podcast!
what is your goal
Investing in real estate takes time, effort and careful consideration. “You can’t go into any investment thinking you just want to make some money, you have to be more specific than that,” Peterson said.
There is a list of factors to determine if real estate investing is right for you. First, you need to understand what capital you need to work with. This will tell you what type of house you can afford.
“You can’t go into any investment thinking you just want to make some money, you have to be more specific than that.”
Next, you need to make a timetable for when you realistically want to get a return on your investment and how long you plan to hold the property.
- Is it an investment to create passive income or to replace your current income?
- Will it be something to boost your retirement nest egg?
- Can you afford the property if it doesn’t generate cash flow right away?
Real estate has traditionally been a valuable asset class, but it’s more of a long-term strategy, and most investors aren’t dumping homes to make a quick buck, Peterson adds. Although property values have skyrocketed over the past few years, most industry analysts predict appreciation will slow, which likely means quick profits are not in store.
Think about your cash flow
Many real estate investors consider their cash flow before taking the plunge. To find out what your cash flow is, analyze the difference between how much you would pay per month and what rental income you would have.
Of course, there’s more to it than the purchase price of the house and the interest rate you’ve locked in. You also need to consider cost, maintenance and management costs.
If all this leads to a profit, then it might be a good idea to invest – as long as that profit is high enough to make it worth your effort. “You can’t control the market, but you can make the best decision for you given the information you have right now,” Peterson said.
>Related: Investment Property Loan Guide: Requirements and Process
Know the rules for secondary properties
Rising mortgage rates this year are adding another layer to real estate investing as lenders charge more for non-prime homes.
How much higher your interest rate will be depends on the type of investment property, the amount of your down payment and your credit score.
The lower your down payment, the higher the rate will be. Lenders prefer investors to put at least 20% down and have a credit score above 740, according to John Mayer, a credit expert at The Mortgage Reports and a licensed MLO.
Typically, interest rates on prime properties are 0.5% to 0.75% higher than the average matching rates. With these higher mortgage rates, it all comes back to making sure you can still maintain a positive cash flow.
Is real estate investing right for you?
Buying a rental investment property can bring in a lot of money – as long as you map it out right.
The last thing to consider is your end game. “When you’re considering selling an investment property, you have to consider selling costs, carrying costs, maintenance, capital gains tax, broker costs,” Peterson concludes. You need to figure out the timeline where you can recoup those costs or you could end up eating them.
For anyone considering going down the road of real estate investing, start by mapping out your current and future expenses. When you’re ready to get started, a mortgage lender can help you crunch the numbers and see if buying an investment property is feasible.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its employees, parent or affiliates.