Thinking of investing in real estate?
Even with mortgage rates and purchasing costs on the rise, investing in real estate could be a lucrative venture. But before diving in, you should figure out if it makes sense for you.
Do you have a timeline with an exit strategy? How much capital do you have and how much will you need? How high does your cash flow need to be to make the juice worth the squeeze?
These are the types of things you need to ask yourself ahead of buying a property, according to mortgage expert Shivani Peterson. You can listen to the full extent of Peterson’s advice on a recent episode of The Mortgage Reports Podcast. Here’s what she had to say.
Listen to Shivani on The Mortgage Reports Podcast!
What’s your goal?
Investing in real estate takes time, effort, and careful thought. “You can’t jump into any sort of investing thinking you just want to make some money, you have to be more specific than that,” Peterson said.
There’s a list of factors to determine if real estate investing is right for you. First, you need to figure out how much capital you have to work with. That will tell you the type of house you can afford.
“You can’t jump into any sort of investing thinking you just want to make some money, you have to be more specific than that.”
Next, you should make a timeline for when you realistically want to get a return on your investment and for how long you plan to hold onto the property.
- Is it an investment to create a passive income or to replace your current income?
- Will it be something to boost your nest egg for retirement?
- Can you afford the property if it doesn’t create cash flow immediately?
Real estate has traditionally been an appreciating asset class — but it’s more of a long-term strategy and most investors aren’t flipping homes to make a quick profit, Peterson adds. While property values skyrocketed over the past few years, appreciation is predicted to slow by most industry analysts, likely meaning rapid gains aren’t in the cards.
Consider your cash flow
Many real estate investors consider their cash flow before taking the plunge. To figure out what your cash flow is, analyze the difference between how much you’d be paying per month and how much rental income you’d have.
Of course, it’s more than just the purchase price of a house and the interest rate you lock in. You also need to factor in expenses, maintenance, and management costs.
If it all adds up to a profit, then it could be a good idea to invest — as long as that profit is high enough to make it worth your efforts. “You can’t control the market but you can make the best decision for you given the information available to you at the time,” Peterson said.
>Related: Investment Property Loan Guide: Requirements and Process
Know the rules for secondary properties
This year’s rising mortgage rates add another layer to real estate investing because lenders charge more for non-primary residences.
How much higher your interest rate will be depends on the type of investment property, your down payment amount, and your credit score.
The lower your down payment, the higher the rate will likely be. Lenders prefer investors to put at least 20% down and to have credit scores above 740, according to Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
Typically, interest rates on secondary properties are 0.5% to 0.75% higher than average conforming rates. With those higher mortgage rates, it all comes back to making sure you can still maintain a positive cash flow.
Is real estate investing right for you?
Buying an investment property to rent out can bring in a lot of money — as long as you map it out right.
The final thing to contemplate is your endgame. “When you’re considering selling an investment property, you have to factor in selling costs, carrying costs, upkeep, capital gains tax, realtor costs,” Peterson concludes. You need to figure out the timeline where you can recoup those costs or you could end up eating them.
For anyone considering going down the road of real estate investing, start by mapping out your current and future expenses. When you’re ready to get started, a mortgage lender can help you run the numbers and figure out if an investment property purchase is feasible.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.