Beginning real estate investing is a series of steps that anybody can take but not everybody is willing to. You can find two extremes; first, being overwhelmed by the many things you have to do and/or know that you immediately think you cannot do it, or falling into the info-mercial trap that if you buy this or that system you will be buying houses, no money down in a couple of days and selling them for $30k profit the next.
My real estate investing experience has been very slow and deliberate. However, my beginning in real estate investing was through the home that I purchased to live in without knowing it would turn out to be a great investment.
Real Estate Investing for Beginners
You see, back in 2001 the Air Force decided to station me in sunny California, so I decided to buy a home there. Most people advised me against it at the time, arguing that the prices were too high. We searched and searched and came upon a 1,300 square foot property for $208,000. Only in California is a 1,300 sq. ft. home worth $200k but that’s another story...
Because of years of saving and investing we were able to put down about $40k down payment. It was scary to put that much money down from our savings but we had done our due diligence and thought it would be worth it. We really did not need that much money down but we did it to keep our payments doable.
In hindsight it was a very smart thing to do. As I have later learned, when beginning real estate investing, you should always buy a property with equity in it. Whether that equity comes from getting the property under market value, because of a down payment or from a combination of both. Always buy with equity.
Fast forward to 2006… long story short, because of a career change we decided to move from California to Atlanta. We sold the house (at what was back then the beginning of the real estate market downturn) for $389,000.
If you do some quick math that was $181,000 more than we paid for it or 87% appreciation over 5 years!! So our total return on investment on that $40,000 down payment was 453% (181,000/40,000=4.53) or 91% per year (4.53/5yrs=.905). Try getting that from the stock market!!
|“Owning a home is a keystone of wealth… both financial affluence and emotional security.” |
- Suze Orman
Now this does not take into consideration the money we put in the house for improvements plus the costs of ownership which were not high since at the time this was a 5 year old house.
The point is that the experience was a real eye opener for me as to the power of real estate. I also now realize that without knowing it I invested at the beginning of a bubble so in a sense I got lucky. But even with the current downturn that purchase was still a great beginning real estate investing experience.
Owning a Home Free and Clear!
Having learned from that experience I knew I wanted to do it again - a new path in my wealth building journey had been revealed. We rolled the profit from that house into our next home purchase in Atlanta where real estate prices were a lot more reasonable. This enabled us to pay cash for our next home purchase. We were now the proud owners of a home free and clear!
Beginning real estate investing can start for you with the home that you live in. As long as you do your due diligence, educate yourself, don’t overpay for a house and buy a good property in a good location you will have an investment in your hands.
Be careful though, as we are discovering in this real estate bubble, this is not always the case if you buy more than you can afford, buy an overpriced house or plain simple try to buy a home before you are ready for it.
Buying a home to live in is not for everyone, though. There are circumstances where you would be better off renting...
For example, if you think that you might be relocating in two years or less, or you have several outstanding debts that you should clear before taking on a mortgage, or you don’t have any money for a down payment, etc.
However, if you do decide that you want to take this first step in real estate investing, and want to make it part of your wealth building strategy, take into consideration the following recommendations when beginning real estate investing.
- When buying a home I would suggest you buy it with the plan to live in it for at least 3 years, 5 would be better. This can be done by you actually living in it for that amount of time or by moving out but still keeping the home and renting it as long as the rent will cover your mortgage payments and a bit more left over (VERY IMPORTANT).
I did this and to this day I still own that property I moved out of.
- Plan on putting 20% down OR buying a home 20% under market value. It is always a wise step to have some equity in your home from the very start. When beginning real estate investing this will protect you in the case of a market downturn, give you a better interest rate on the loan and will get you started on the way to paying off the house, which after all is the ultimate goal!
You can achieve the 20% down goal by good old fashioned savings and investing or by finding a great deal. Better yet, do a combination of both, some down payment and an undervalued home at a good price.
- Your credit score is crucial. By having good credit we have saved thousands of dollars over the last 5 years by giving us low interest rates and eliminating fees. Better yet it has made us money by giving us access to mortgages and lines of credit that are not available to people with low credit scores.
Find out now what is your credit score if you don’t know it and make a plan today to fix it if you have to. Free credit report.
- Education, education, education! Education in real estate investing is crucial. Learn about the subject of purchasing a home: selecting location, finding out what you can afford, mortgages, the buying process, etc.
When beginning real estate investing don’t let your education come from somebody that is trying to sell you something (mortgage banker, real estate agent, etc.) - educate yourself.
- Find out where are the good schools. This applies whether you have children or not since homes located in areas with good schools usually appreciate more, are in higher demand and sell faster. Although there are more steps involved in selecting a property location, over the years I have found that this step alone is a big part of good location choice.
- If you qualify, get a VA loan. This is one of the greatest deals available to military veterans for beginning real estate investing. I used mine to purchase a home at a significant discount from a builder who needed to sell and it saved me thousands by avoiding high down payments, mortgage insurance and combined with a good credit score – a low interest rate. Find out if you are eligible here.
The home that I live in was the first step when beginning real estate investing. Since that opened my eyes to the possibilities of creating wealth with real estate, I now wanted to acquire more properties to increase my equity position.
In order to do that the next step in real estate investing for beginners is education. This is so crucial that I will discuss it in the second part of this article,
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