The current real estate market is on fire with unprecedented appreciation, and even small-town America is seeing major climbs in house values. The hot market has also hit the public’s radar, and many people are seeking information on how to begin their own real estate investing journey. You might be among them and wonder where to begin as an investor too.
There are several avenues to learn about the fundamentals of real estate investing. Publications like Think Realty magazine, sites like Bigger Pockets, YouTube influencers, and bloggers flood the internet with strategies and opinions for those new to real estate investing.
Novice investors need to surround themselves with an experienced group of professionals who can confirm that the profitability numbers of their project are close to what they can expect in the “real world.” Lack of access to this type of experience and market understanding are what makes the first few purchases stressful and risky.
Another essential is having a good contractor who can estimate costs and supply quality and timely workmanship. This can be the difference between a profitable project and one that loses money. Additionally, having a realistic view of what the property can be sold or rented for is critical to making a sound investment. Finding an experienced realtor with access to complete market data is another crucial factor determining success or failure when investing.
Many first-time investors do not have a good handle on the added costs involved in the property investment. These expenses can deteriorate an investor’s expected profits or even turn them into losses. Some of the extra outlays include items like real estate taxes, property insurance, title insurance and closing fees, realtor commissions, closing costs, and monthly interest on the loan to acquire the property. These costs add up quickly and make it more challenging to find highly profitable properties to acquire.
4 Tips for Investment Success
Here are several tips to help you with your first investment and make sure it’s a successful endeavor.
- Seek a successful partner for your first value-added investment. Chances are that partner will have an established team. You can share in the ownership and profits on the first deal and learn about the process. Gaining knowledge in your first three investments can be more important than profits.
- Don’t try to bite off too much for your first few projects. Look for light- to moderate-sized rehabs that you can complete within three months. That allows you to put the property on the market for sale or rent. Heavy rehabs or new construction projects are not recommended for inexperienced investors. The risks are too great.
- Make sure you have plenty of liquid assets available. You need to be prepared for any cost overruns or surprises lurking behinds walls. Private lenders will provide much of the funds needed, but ensure you have monies to keep your contractors working at a speedy pace. Lenders work on a reimbursement basis, so you need personal funds to support the process.
- Monitor and improve your FICO score. Many first-time investors try to fund rehabs on personal credit cards. This is generally a bad idea since it adversely affects your FICO score when you carry balances near your credit limits. For rehab loans, lenders may reduce the amount they will lend you if the FICO score is below a certain level. The best advice for investors is to try and stay above a 700 FICO score. This helps you avoid lower loan amounts and higher rates.
Success in real estate investing comes through experience, having the right resources at your fingertips, and a solid team working with you. Even the most experienced investors make mistakes or have unforeseen issues that make a deal unprofitable. Your goal is to learn from those mistakes and limit their frequency.
Damon Riehl is the founder and CEO of Investment Property Loan Exchange. He has more than 35 years of lending experience in a broad array of asset classes, including commercial and residential mortgage, small business, and construction lending.
Riehl held top leadership positions as head of commercial lending for Ocwen Mortgage, head of unsecured lending for Citibank, global mortgage leader for GE Capital, and head of construction products at Fannie Mae. He is a member of the Harvard Joint Centers for Housing Studies.
Riehl has built six de novo lending platforms and used that knowledge to build and grow Investment Property Loan Exchange and the FinTech platform LoanBidz.com.