Real Estate Investing Tips to Get You Started
RESEARCH, PLANNING & HARD WORK
By Eric Tyson and Robert S. Griswold
Get a copy of your credit report and correct any errors-today. Chargeoffs that were actually paid or a department store credit card account that shows late payments when the amounts are disputed can all contribute to a significant reduction in your credit score. At the very least, ask the credit bureau to place your comments in your file with your version of any disputes. Of course, if legitimate delinquent balances appear, be sure to formulate payment plans and send the credit reporting bureau updates showing the balance was paid.
Figure out how to live more frugally. The new real estate investor should probably be developing additional sources of income while holding or preferably even cutting current expenses. Most people generate wealth and achieve a higher standard of living through sacrifice and living below their means in the short-term. Maybe you can live with your current car for a few more years, or you don't really need to live in the new luxury apartment community with recreational facilities and amenities that you won't use anyway. For more ideas on how to track and reduce your expenses, pick up a copy of the latest edition of Tyson's Personal Finance For Dummies (Wiley).
Have your real estate team in place before you begin your serious property searching. Line up a good real estate agent, loan officer, tax advisor, lawyer, and so on early because the real estate investor with the best resources can identify the properties to ignore and those worthy of careful consideration. Move quickly-the speed at which you can close a transaction is an advantage in any type of market.
Think small at first. Begin investing in real estate with small residential properties for several reasons. For one, almost everyone has been a renter at some point and thus the responsibilities of a residential landlord are easy to understand. Also, the initial capital requirements are generally lower. After you've mastered residential real estate investing, you will want to seriously consider investing in large residential apartment buildings and commercial properties because they offer higher sustained returns.
Think "location, location, value." This adage clearly emphasizes location but also the importance of finding good value for your investment dollar. Owning real estate in up-and-coming areas with new development or renovated properties enhances finding and keeping good tenants and leads to greater returns. Another great opportunity is properties in solid locations but with extensive deferred maintenance, especially aesthetic issues that can be inexpensively addressed.
It's usually best to avoid "perfect" properties. A real estate investor using the get-rich-right method doesn't buy new or fully renovated properties, unless it is in the path of progress or a prime location, because the value-added or upside has already been taken by the current owner. These properties may be solid investments but you will be limited to the market increases in rent and value only. However, in some special situations, buying a new or fully renovated property is a good investment alternative. For example, buying a residential rental property in the first phase of an oceanfront community or another unique location that is difficult to replicate could be a great investment in the long run. The pricing in first phases of new developments is often very favorable because the developer must pre-sell a certain number of the units before his permanent loan kicks in.
Make real estate investments close by. Buy property within two hours away from your home by your favorite mode of transportation. Venture further only when you really know another real estate market and regularly find yourself there for other reasons or you've found an excellent property manager.
Among residential property options, focus on small apartment buildings and single-family homes. Attached housing makes more sense for investors who don't want to deal with building maintenance and security issues. Attached housing prices tend to perform best in developed urban environments.
Do your own cash flow homework. Be sure to prepare your own income and expense pro formas from scratch and don't rely on operating results or projections presented by the seller or her broker. Sellers are likely to overstate income and understate expenses-and claim ignorance when the actual results vary. Developing an accurate projection of income and expenses requires the real estate investor to research the market and determine in advance what the cash flow will be upon the implementation of his investment and management plan. This is the only way to know the investment value or what the property is worth to you.
Making at least a 20 to 25 percent down payment provides access to the best financing terms. You can make smaller down payments-even as low as 10 percent or less-but you'll often pay a much higher interest rate, loan fees, and private mortgage insurance. Leverage, or the use of the lenders' money to cover the majority of your acquisition costs, can boost your rates of return. But too much leverage can be dangerous if the rental market turns and your debt expenses are high.
Excerpted from Real Estate Investing for Dummies by Eric Tyson and Robert S. Griswold. Copyright © 2005 by Eric Tyson and Robert Griswold.. Excerpted by arrangement with Wiley Publishing, Inc. All rights reserved. $21.99. Available in local bookstores or call 877.762.2974 or click here.