Tips for First-Time Real Estate Investors
Date: October 22, 2020
Real estate can be a good investment that helps build wealth and secure a financial future. According to Investopedia, average 20-year returns in commercial real estate hover around 9.5 percent, while residential and diversified real estate average returns of 10.6 percent.
Investing in real estate can be risky, and it’s important that first-time investors consider a host of factors before deciding to delve into the real estate market.
Real estate can potentially yield big returns, but these may only materialize after investors spend ample amounts of money refurbishing or even maintaining their investment properties. Prospective investors without the capital on hand to finance repairs or routine maintenance may find it difficult to make their properties appealing to potential tenants, which can make it harder to meet mortgage payment. Prospective investors who already have sizable debts, be it consumer debt or existing mortgage payments, may want to pay down those debts before investing in real estate.
According to Wells Fargo, mortgage insurance does not cover investment property, and loans typically require a minimum down payment of 20 percent of the value of the property. Investors should not just make sure they can meet that 20 percent requirement, but also ensure they have enough capital left after making their down payments to address any repairs that need to be made. If not, they might have trouble attracting renters willing to pay enough in rent.
Prospective real estate investors may be surprised to learn that investment property loans are often subject to higher interest rates than those for home buyers borrowing to purchase a primary residence, says Quicken Loans. Investors should not count on getting the same or better interest rates for their investment properties that they did when buying the homes they currently live in.
Some lenders may require that prospective investors have sizable financial reserves before they will lend them money to invest in real estate. Some ay require that borrowers have several months’ worth of reserves to finance both their personal lives and their investments. If a 20 percent down payment would make that impossible then prospective investors may want to wait a little longer to invest and save more money until their financial reserves would prove more acceptable to lenders.