This year my wife and I are thinking long term and aiming to be extra ambitious. What type of ambitious venture are we talking about? We are considering purchasing a second property. We are getting sick and tired of the 9 -5 life and looking for an investment vehicle to bring in cash at the same time keep up with inflation rates or more. Real estate is the best of both worlds but is risky. So this post is just sharing some information I came by in my research from articles and talking to friends in the field. Here are a few tips if you are considering about real estate as an investment.
Bigger Down Payment
For a first homebuyer the government and mortgage company is very lenient about the process and down payment. However, when it comes to making money the process is more intensive. The mortgage company will usually require a down payment of 20% though 25% is recommended. Keep in mind as well that the higher the down payment the better chances you have of securing the loan. If you have the means to buy in cash, then you are set but otherwise you need to save up minimum 20% for the down payment. Start saving that cash now!
Debt to Income Ratio
To qualify for an investment loan is very similar to a first purchase home loan when it comes to the debt to income ratio. The bank will count the current mortgage and that will affect the likelihood of securing the loan. To avoid this issue it’s best to pay off small monthly debts to improve your ratio. Banks will take into factor your monthly spending on debts such as, mortgage, auto loans, student loans, credit card, child support, alimony and other monthly debt obligations. Thus either decrease the debt or increase the income to get a favorable debt to income ratio. Start by viewing your debt list and
Banks will require a higher credit score before handing out cash for an investment property. Compared to owner-occupied loans that will take credit as low as 600, for an investment property the recommended score is a high 720. This score will vary so lets consider it a range of 700 – 730.
Skip the Renovations
This point hits home for me as it was my original plan. Not too surprisingly though but most articles/stories recommend to stay away from renovations. I know it’s tempting during this time of gentrification to buy real low and fix it up for a higher profit. For a professional that can be a viable option as it is backed by experience. For a newbie in the investment world it’s best to stay away unless you have cash reserves for the renovation.
In addition, according to one of my favorite podcasts “Bigger Pockets” the key to a successful renovation is a trust worthy general contractor. Those are hard to come by though. Therefore, the safest option is to buy an investment property with minor renovations required and working towards a tenant ASAP.
Long Term Goal
Having a plan with a large purchase is an essential. This of course isn’t exactly a requirement to qualify for a loan but in my book it should be. Decide whether flipping a home is your cup of tea, but don’t forget about the extra taxes on the capital gain. If you are a long-term thinker then renting out the property while paying the mortgage down ASAP will be an ideal plan. Either way think what do you want to accomplish at the end of the day.
From our discussion, we are planning for long-term income for many reasons and by knowing the above it helps set our goals. Up next for us is just saving the down payment and increasing our credit scores more. Our ambitious goal is to own an investment property sometime this year but realistically it may not happen until summer 2018. No rush on our side however, we still taking care of our first home. I hope this helps by expanding your knowledge if you ever considered in getting into investment properties. I highly suggest saving as much cash as possible and listening to Bigger Pockets. Read my other post as lessons we learned about purchasing a home as well.
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