If you are looking to bring in a second income or are hoping to replace your primary income altogether, real estate investing may be an excellent option. Real estate investment is a well-established side hustle and has many advantages over new ways of making money on the side.
While you may be reluctant to get into real estate investment due to the current recession, while the housing market does wax and wane, recessions usually do not have a significant effect. We tend to have some sort of recession every four years, but real estate perseveres. One reason is that people will always need a place to live.
If you have some extra money to invest and want to see that money grow, then follow this guide to getting started in real estate.
Setting a Realistic Budget
The first thing you will need to do before getting started in real estate is to set a realistic budget. You do not want to put too much strain on your finances, especially if you are new to real estate investing.
You may want to start by looking at your income and savings to see how much expendable income you have. If you haven’t already, work out a budget to see how much you can truly afford.
Once you have your number, try to stick with it. Don’t let yourself be swayed by the potential for big profits. Start small and wait to take risks until you’ve built up more investment income.
Getting Pre-Approved for a Mortgage
The next step is to get pre-approved for a mortgage unless, of course, you have money to buy in full. It is important to get your pre-approval before you begin to shop around so that you know exactly what you can afford. It is also a good idea to consult a few different lenders so that you can make sure you are getting the best interest rates.
You will need to take a few documents with you for your meetings, including proof of income and assets and your tax records for the past couple of years. You may also need to have an idea of how much you can spend on a down payment. The lender will run your credit and let you know how much you can borrow and what your monthly payment will look like.
If your credit score is not high, you may want to wait a year or two and build it back up before getting into real estate investment.
20% Down Payment vs. PMI
If you do not have at least 20% of the total home cost for a down payment, your lender will most likely require you to pay private mortgage insurance or PMI. Lenders require this to protect themselves in case you default on your mortgage.
PMI is usually paid as a percentage of the total loan when you first buy and then as an annual percentage. The amount you pay will vary based on the type of loan you get and the amount you borrow.
If you can pay the 20% down payment, that is your best option. You want to avoid PMI if you can. You will spend more money each month and over the lifetime of your loan. In some cases, your total additional cost can be in the tens of thousands of dollars.
While you may be okay accepting a PMI when purchasing your personal home, it is not the best idea for an investment property, because it can make a significant cut in your profits.
Hiring a Good Realtor
Unless you have a lot of knowledge about the real estate market, one of the best ways you can help yourself is to hire a good realtor. A good realtor can help you with the ins and outs of purchasing an investment property. By finding a realtor who is knowledgeable about your area, you can be sure to find a property that will give you the best return on your investment.
Your realtor will also have experience in finding the right property and knows the ins and outs of the buying process. A good realtor is also an expert negotiator so that you can get the best price for your investment property. A good realtor can also prevent you from making a bad investment and prevent you from taking risks that may not pay off in the long run.
Have an Inspection Done
Once you have found your investment property, you will be ready to make the purchase so that you can start turning a profit. However, before you buy, you need to have an inspection done on the property. A professional property inspection is a nominal cost that can save you a considerable sum of money down the line.
Inspections are necessary because a property may look great on the surface, but an inspector can determine if any underlying issues may cost you more than you are willing to pay.
Single Family Home vs. Condo Investing
If you are trying to decide between investing in a single-family home or a condo, there are several factors that come into play. Some of it will depend on your location and what the housing market looks like.
In most cases, it is better to invest in a single-family home. Single-family homes are more likely to appreciate. If you choose to rent out your property, your upkeep fees will probably be much less with a house than a condo. People renting a home are likely to do a lot of the upkeep themselves, whereas a condo requires much more maintenance.
There are often extra fees associated with condos that can eat into your profit as well. It may be difficult to raise the rent to accommodate these fees if you live in an area with low rent prices.
When it is time to sell, you have a better chance of making a good profit on a home than a condo. You should only consider buying a condo if you find one for a price that is so low, it will offset any fees you incur.
Another investment option to consider is Airbnb investment. Vacation rental properties are only growing in popularity. You will just want to keep in mind that there are both advantages and disadvantages to owning a short-term rental property.
In some cases, you can earn more with Airbnb. You can charge more per night, giving you the potential to make more per month. If you live in an area that is popular with travelers, you can really turn a profit.
One problem is that you may not fill your Airbnb property every night. Your income may fluctuate more than with traditional rental property.
You may also incur more maintenance fees, as short-term renters will require more cleanup and damage repair. You will also have to furnish your Airbnb, and you may have to use more expensive items if you want to make the place appealing.
If you are concerned about investing in an Airbnb property during these uncertain times where people are not traveling as much, you could always do a long term lease until travel picks up again. You could rent out to one family, or rent each room out to young professionals.
With careful consideration and a set of proven steps, you can make wise choices about real estate investment. It is a great money-making opportunity, and over time, you may be able to scale it to replace your primary income.