The bulk of my day to day work is helping clients who are looking for a new home, whether they’re first time buyers or folks looking to upgrade or downsize. But not a small part of my job is working with clients looking to invest in real estate.
I’m not talking about high rolling investors looking to gobble up land and properties like Hungry Hungry Hippos. My clients are average people looking to capitalize on a strong and reliable market – people looking for so-called “passive” income (I’ll get to the quotes later) and bolster their retirement portfolios.
This month I thought I’d take some time to talk about what the process is like for someone looking to invest in real estate. Specifically, I thought I’d discuss the key differences between buying a home as your primary residence and buying a home as an investment property.
Although we’re still talking about a real estate transaction, the roads leading up to this final destination are very different. There’s a major contrast between the pathway for a traditional home buyer and the pathway for real estate investment.
So I’m going to go over some of the key differences in investing in real estate.
The first major difference starts with searching for a property. Knowing how you want to invest in real estate is essential here. Investing in real estate is different from traditional investments like the stock market. Real estate offers a variety of investment options.
Some clients are looking for multi-family homes with the potential for long-term renters. Others are looking for vacation homes for short-term renters. Some are looking for long-term returns while others are looking for short-term profits. From land holding, flipping homes and commercial/residential hybrid options, there are a variety of investment opportunities in real estate.
Understanding each option and choosing what works best for you is the first step. From there you can zone in on the appropriate market choices in your affordability range and further focus on the properties that you like as an investment.
This is often one of the most difficult parts of investment real estate. The traditional home buying process is a healthy mix of aesthetics, practicality and affordability. With an investment property, clients often have to balance affordability with investment potential, but liking your property and “aesthetic” appeal shouldn’t be undermined, either.
Keep in mind that well-maintained and visually appealing properties provide good assurance for property resale however far out into the future.
The next major difference is financing. Most of my clients who are venturing into real estate as an investment are relying on a mortgage or other financing to start off. Often, clients will use the equity built up in their primary home for a downpayment on their next property too.
Whether you have the money saved or are tapping into equity to help jump into real estate investing, understanding how the financing works and differs from traditional home buying is essential.
First off, there are many different financing options available. Certainly, there are far too many for me to cover in this blog post today. Consider all your options and find the financing that’s right for you.
For this post I’m going to be discussing conventional financing through a bank lender because it’s the most commonly used – not only for investment but traditional home buyers too.
Obtaining financing for your primary residence home can be a bear all its own. Financing for investment properties is even more stringent and demanding for potential investors.
Some traditional mortgages for home buyers can ask for down payments as low as 5%. But for most investment financing, your expected down payment will be at least 20%, and can go as high as 30% or more.
Proof of income and personal credit are also scrutinized even more. Some lenders might require investment plans and strategies for the property or a client’s portfolio. Generally, lenders want to see liquid assets to an amount that can cover your mortgages for up to six months.
Every lender is different, and what they require will vary, but the key concept to remember is that the process is considerably more strict than what you may have encountered when buying your primary residence, and it’s important to be prepared.
The final key difference I’d like to discuss is managing your property. This comes after the hurdles of finding your place, obtaining the requisite financing and purchasing your new investment property.
Having a plan for managing your property is essential. There are several different options. My clients mostly manage the properties on their own or hire a company to do it for them.
It’s important to think about what works best for you. Property management companies are great in that they remove the everyday stresses and concerns associated with an investment property, but they come with a price, and you have to factor in those costs and determine the profitability of using them.
Here are a few good questions to consider when it comes to how you want to manage your property: Do you want to find and select tenants yourself? Are you going to collect monthly rent? Are you willing to manage everyday maintenance issues and the general upkeep for the property?
If not, you should think about hiring a company to manage your property. With that, you have to consider what percentage of the monthly rental income you can afford to give up for someone else to take care of your property.
Real estate investment is not easy. This is where I discuss those quotes around passive income. From searching and finding a property, to obtaining the right financing, to managing and maintaining your property, investing in real estate can be a considerable amount of work.
But the payoff is self-evident. According to FortuneBuilders, around 71% of people who reported an income greater than a million dollars over the last 50 years was in real estate. Sticking it out through the grind of making your real estate investment dreams a reality is certainly worth all the hustling.
If you have any more questions, or want to discuss the potentials of investing in real estate further, shoot me a message or give me a call. I’d be happy to sit down with you and discuss all of these topics above in greater detail!