Real Estate Finance Basics
Getting started in real estate investment isn’t for the faint-hearted. Let’s start with Real Estate Finance Basics. There are so many things to know and pitfalls to avoid. If you’re just starting out, one of the most challenging aspects of real estate investment is how to fund your projects. Most people don’t have the kind of money needed to outlay at the beginning of a real estate investment. So, what do you need to know about financing as you begin your career in real estate?
A Good Deal?
You’ll need to figure out if the property in which you’re investing is going to make or lose you money. You need something better than a crystal ball or a hunch to figure that out, too. You need to study up on your potential property. First, you have to know what the purchase price is. Then, you need to know if the property needs improvements and what a reasonable estimate of those costs will be. Add those numbers together. This is the total cost of your real estate investment.
Now, look at similar rental properties in similar neighborhoods and see how much their rent is. If the amount you’ll get for monthly rent is less than 1% of the total cost of your investment, there’s a good chance you’re going to lose money, no matter what the size of the property. Also, if your chosen investment area has a high cost of living, you’ll need to get even more for rent to ensure you’re making a profit.
Unless you already have deep pockets and are just looking for a way to invest your excess cash, you’re going to need financing for your real estate investment. Most people go the traditional route and take out a loan for this. There are, however, different types of loans you can investigate. The traditional mortgage loan works for many people. A variation on the same, the Federal Housing Administration (FHA) loan, only applies if you live in the home you’re buying and it has to be your first purchased home.
Even less applicable is the 203 loan from FHA which only applies to fixer-uppers in which you plan to live.
If you already have a primary residence with some equity, you can use that to secure a home equity line of credit to purchase your investment property. You could also look outside traditional banks to private donors for a hard money loan.
Financing is only one of the many categories of information you’ll need to understand so you make a profit at real estate investment.