Have you been thinking about investing in real estate? If you have, getting your finances in order before you start searching for properties will save you from some headaches down the road. For many, a real estate investment is likely one the the largest investments they will make, and unless there is cash ready to invest, a plan for financing and a plan for cash flow in the future is needed.
Here's what you need to do before you start the process:
1) Have A Financing Plan
If you have good credit, consistent W-2 income, and a decent down payment, traditional financing is probably your best option. Discuss how much you can afford with a loan officer, based on your current expenses, and how much money you'll need for renovations. Knowing where your funds will come from will improve your chances of securing a good deal.
2) Review Your Credit Report
Request a copy of your credit report through one of the credit bureaus, and dispute any errors that may appear, or provide explanations for issues or late payments. Keep your credit score from dropping by avoiding new credit inquiries, canceling any credit accounts, or lowering your limits with any creditors.
3) Get Pre-Approved
When you have an approved mortgage, most lenders will lock in an interest rate, so when searching for the perfect investment property, you can relax knowing that your rate isn't going to change. To get pre-approved for a mortgage, you'll need to have the following:
- Two forms of government-issued ID
- Your social security number
- Proof of ownership of any other properties, including your primary residence or other investment properties.
- Tax returns for the last two years.
- Proof of income: W2s, paycheck stubs, 1099s, or if you're self-employed, a year-to-date profit and loss statement.
- Proof of assets: Bank statements, 401Ks, IRAs, and money held in stocks or mutual funds.
- Summary of your debt: Primary property loan(s), credit card balances, student loans, and all monthly payment amounts.
4) Additional Funds
Based on your financing plan, you need to figure out how much cash you should have in hand for a down payment and closing costs. Also consider how much cash you'll need for renovations & repairs if the properties you’re considering are not “turn-key”. Think about your cash flow from month to month to make sure you're not projecting in the negatives. Or if you are, that you have a backup source of cash such as drawing from your personal accounts.
The goal of real estate investing is to make money. As your investment style evolves and matures as a real estate investor, the amount of risk you can withstand is bound to change. Keep your original goals in mind, and do your homework to help position yourself to enjoy the financial returns.
Thinking of investing in real estate or changing your investing goals?Contact me today!