Questions That Need Answers Before You Purchase Properties for Investment

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Is my credit strong enough? How do I shop for a lender? What makes a perfect property for investment? These are questions that new investors are going to encounter as they begin learning and developing their real estate investing business. These questions must be answered before purchasing your first property. This article will answer these questions and many others. Hopefully it will prevent you from making some of the mistakes I made along the way. I’ll walk you through all the possible scenarios. I will be that seasoned investor guiding you as you become successful.

Let’s discuss your credit and why it’s important. Your credit is rated by a group of numbers called your FICO score. Lending institutions use these numbers to decide whether you are credit worthy, and whether they will extend credit to you. You can check your credit scores through a bank, mortgage company or free online sites. If your credit rating is low, you can build it by paying minimum payments before they become 30 days late. You may say “well I need to pay them on time”. That’s true, but your creditors only report 30, 60, and 90 days of lateness to the credit bureaus. So if you pay bills on the 10th, 15th, or 29th day credit bureaus are not contacted. Did you know each time your credit is pulled your score can potentially drop? Once you find your credit to be satisfactory don’t, let several lenders pull your credit. My advice is to have one company run your credit, ask for a copy of the credit report, then use the copy to show other lenders. The other lenders can tell you if you qualify for the loan before they run one for themselves.

When looking for a lender, keep in mind that not all lenders specialize in investment properties. Many lenders accommodate owner occupants. These loans are for people using the property as their primary residence. Most lenders, because of Fanny Mae guidelines, will only allow you to have 10 mortgages at one time. Thereafter, you’ll have to find other sources for lending. The best way to find a lender is by finding a realtor who sells investment properties. Realtors have lenders who work specifically with investors. I prefer mortgage brokers for financing rather than banks. A broker will run your credit report once and “shop” the loan to several banks and lending institutions. A bank will either qualify or deny your loan request one time. If you decide to go to three different banks your credit report will be ran three separate times. The advantages of using a bank are fewer fees and lower interest rate. The downside is it’s harder to qualify for a loan through a bank as an investor. Save yourself time, start with a broker!

Now that you know your credit score, found a realtor and lender, you’re ready to find that first investment property. The first thing you want to understand is there’s no perfect investment property. However, there are properties that will give you a higher rate of return. Never view a property as a personal residence. If you do you’ll probably spend too much on the repairs.

Before you choose a property you want to compare the property value with the actual property cost, plus repairs. Determine the loan amount, which will be 70% – 80% of the property value. Then you can determine the monthly payment. The location of the property will determine the monthly rental charge. Your goal should be to rent out the property yielding a positive income of at least $200-$300 a month, and still have 20%-30% equity in the home. That’s a good property for investment. In the investment game it’s numbers that make or break a deal. Some people will say $200 dollars a month is not very much for the hassle. I say $200 multiplied by ten properties is $2000 positive cash flow each month. Always think numbers.

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sonja April 25, 2012 at 5:31 pm

Hi,
I have small very beginners question.
Recently I started real estate investment with 2 gentlemen where I participated with 1/3 of the investment and should get 1/3 of the profit.
Since this is my first job with these gentlemen I was careful to consult my attorney during the process of purchasing the house. I have Short deed of trust for my part.
Please advise me how can I make sure that they are honest with me regarding expenses for the fixing the property and selling price. Who should I hire to help me? Accountant?
One of the gentlemen told me today they are going to sell house for the price that is $30,000 less then what contractor who knows the buyer told me.
Is there a way for my partners to cheat on me and how can I make sure they do not.

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