Real estate can be a truly lucrative and beneficial investment. It has the ability to produce monthly cash flow while increasing in value. Your tenants can meanwhile fund your mortgage reduction efforts for further equity accumulation. These financial benefits are combined with the tax benefits and the ability to leverage your purchase with financing. The reality is that you will be hard-pressed to find another investment vehicle that is as beneficial as real estate is. However, while you can leverage most of your purchase with a mortgage, you will still need a substantial amount of capital to make the investment. These are the upstart costs associated with investing in real estate for the first time.
Educational Expenses
Real estate investing is not something that you want to venture into without some background knowledge. You must have a clear understanding of selecting the right property, setting up financing that generates positive cash flow, taxation implications, tenant and management issues and more. You can glean some information by reading several reputable real estates investing books. However, you may also benefit by taking formal classes on the top of real estate, finance and more. Robert Tweed offers scholarships for some finance-related courses. The cost of the books and classes should be taken into account as you begin examining the total upstart cost for your future investment activities. Remember that you also may need to factor in the time necessary to improve your knowledge base.
A Down Payment
After you have enhanced your education in the area of real estate investing, you can begin searching for an excellent property to purchase. Hiring a real estate agent is a smart idea, and thankfully, the services of a real estate agent are typically paid for by the seller rather than by the buyer. Real estate investment loan programs through Robert Tweed and other sources have varying down payment requirements. For example, if you are buying a single-family home as an investment, you may qualify for a loan of 75 to 80 percent loan-to-value in many cases. Some residential investor loans have an even higher loan-to-value. Investing in a commercial retail strip center, however, may require you to put as much as 25 to 30 percent down. The sales price and available financing for the property type that you are looking at will affect your down payment amount. Your financing options may also be limited by your credit score, net worth and various other factors.
Closing Costs
In addition to having enough capital available to pay the down payment on your real estate investment purchase, you also must pay the closing costs. A general rule is to estimate between three and four percent of the sales price as closing costs. The seller may concede to paying some of your closing costs, but you need to ensure that this is permissible by your lender. The closing costs include title insurance, legal fees, prepaid taxes and insurance, an appraisal, a property inspection and more. Remember that many lenders require you to have at least three to six months of mortgage payments available in liquid cash after the down payment and closing costs are taken into account. Therefore, this lender-required reserve should also be included in your financial calculations. Your loan request may not be approved if this financial requirement is not met and properly documented.
A Reserve Fund
While the lender typically requires you to document the availability of reserve funds after closing costs and the down payment are taken into account, it is important to consider how much money you prefer to have in a reserve fund. Remember that vacancies can result in lost revenue as well as in repair and upgrading costs. Vacant units typically mean that the property is operating at a loss until the unit is leased. You must have enough cash on hand to pay for the mortgage, repairs and operating expenses during vacancy periods. The property also may need more significant repairs over the years, such as an HVAC or roof replacement. In some cases, you may need to pay the insurance deductible when filing a claim. As you can see, it is necessary to have a healthy reserve fund if you want to keep your property well-maintained and to avoid financial stress in the process. Some investors find that their comfort level with regards to a reserve fund is substantially higher than the lender required reserve amount.
For many first-time real estate investors, it makes sense to learn as much as possible before buying your first property. However, there are many things that you will learn from personal experiences. The more expensive the property is, the greater the risk in some cases. Therefore, it may be wise to start with a smaller investment property. It may also be helpful to use the services of a real estate agent who is experienced helping investors locate quality properties.
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