Thinking of investing in real estate?
Even with mortgage rates and buying costs on the rise, investing in real estate could be a lucrative business. 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? What should your cash flow be to make the juice worth it?
These are the kinds of things you need to ask yourself before buying a property, according to mortgage expert Shivani Peterson. You can listen to the full breadth of Peterson’s advice on a recent episode of The Mortgage Reports podcast. Here’s what she had to say.
Listen to Shivani on The Mortgage Reports Podcast!
What is your purpose?
Investing in real estate takes time, effort and careful thought. “You can’t go into any type of investing thinking you just want to make 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 determine how much capital you have to work with. This will tell you what type of home you can afford.
“You can’t go into any kind of investing thinking you just want to make money, you have to be more specific than that.”
Next, you need to set a timeline to determine when you realistically want to see a return on your investment and how long you expect 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 nest egg for retirement?
- Can you afford the property if it doesn’t create cash flow immediately?
Real estate has traditionally been an appreciating asset class, but it’s more of a long-term strategy and most investors don’t switch houses to make a quick profit, Peterson adds. As property values have skyrocketed over the past few years, most industry analysts expect appreciation to slow, which likely means quick gains aren’t in the cards.
Consider your cash flow
Many real estate investors consider their cash flow before taking the plunge. To determine your cash flow, analyze the difference between the amount you would pay per month and the rental income you would have.
Of course, it’s not just about the purchase price of a home and the interest rate you set. You also need to consider expenses, maintenance and management fees.
If all of this translates into a profit, then it might be a good idea to invest – as long as that profit is high enough to make your efforts worthwhile. “You can’t control the market, but you can make the best decision for you given the information you have at the time,” Peterson said.
>Related: Guide to Investment Property Loans: Requirements and Process
Know the rules of secondary properties
This year’s mortgage rate hike adds another layer to real estate investing, as lenders charge more for non-primary residences.
The increase in your interest rate 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 is likely to be. According Jon MeyerLending Expert from The Mortgage Reports and Certified MLO.
Typically, interest rates on secondary properties are 0.5% to 0.75% higher than average conforming rates. With these higher mortgage rates, it all comes down to making sure you can still maintain a positive cash flow.
Is real estate investing right for you?
Buying an investment property to let can be a big buck – as long as you plan it right.
The last thing to contemplate is your endgame. “When you’re looking to sell an investment property, you need to factor in selling costs, owning costs, maintenance, capital gains tax, realtor fees,” Peterson concludes. You need to figure out the timeframe in which you can recoup these costs or you could end up eating them.
For anyone considering investing in real estate, start by mapping out your current and future expenses. When you’re ready to get started, a mortgage lender can help you do the math and determine if buying an investment property is feasible.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising 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 officers, parent company or affiliates.