Guest Post from Lexington Law
Thanks to shows like “Flip This House,” “The Deed: Chicago,” and “Property Brothers,” just about everyone has caught a glimpse into real estate investing. And while many people may not have aspirations of that magnitude, most Americans have likely considered buying real estate as an investment. That’s not surprising considering real estate — especially in the past 5+ years — has proven to be a lucrative investment and a great way to diversify an existing investment portfolio.
The catch, of course, is that the average person doesn’t know the first thing about buying real estate. If you’re interested in owning real estate but aren’t sure where to begin, here are some of the basics you’ll need to get started:
Check your credit report
The first thing you’ll need to do is review your credit report. All consumers are entitled to receive a free copy of their credit report once a year.
If it’s been awhile since you’ve checked your credit report, this is the first step you’ll want to take to ensure that your report is fair and accurate and to take any necessary action to dispute errors
Improve your credit score
Once you’ve reviewed your credit report, you can determine whether you need to fix your credit
or improve your score. A higher credit score is essential to get the best possible interest on a real estate loan. Because the rates for investment property loans are higher than owner-occupied properties, you’ll want to make sure you give yourself every opportunity to secure the lowest interest rate possible. A good credit score — typically above 720 — will garner the best interest rates.
Determine what you can afford to invest in real estate
Unless you’re like the “Property Brothers,” or professional fix-and-flippers, be realistic about what you can afford in terms of an investment property. Just as you would when buying a primary residence, you can work with a lender to determine what the payment will be on different loan amounts. Depending on your approach to real estate ownership, this may vary.
Let’s take a look at some possible paths to real estate ownership:
1. Buying rental property — For many people who own real estate, buying and then renting out a small property was their first foray into investment properties. This can be an entry-level way to generate some extra cash as well as a beneficial tax write-off. Of course, for most first-time investors, this also means playing the part of landlord since retaining a property manager or property management company equals more money out of pocket. If you’re going to get into owning real estate, you need to understand what acting as a landlord entails and ask yourself if you have the time and temperament to do so.
2. Buying REITs — Real estate investment trusts, or REITs, allow you to invest in real estate without the physical real estate. Like mutual funds, REITs are companies that own commercial real estate — including office buildings, retail spaces, apartments or hotels. REITs are a lucrative retirement investment because they pay high dividends. And if you’re an investor that doesn’t need or want the regular income, you have the option of automatically reinvesting dividends to grow the investment. Some REITs trade on an exchange like a stock and others aren’t publicly traded. It’s generally recommended that new investors choose publicly traded REITs.
3. Using online real estate platforms — These platforms connect real estate developers to investors who want to finance projects via debt or equity. In this scenario, investors ideally receive monthly or quarterly distributions in exchange for taking the risk and paying a fee to the platform. It’s important to note, however, that these platforms are open to accredited investors only as defined by the Securities and Exchange Commission. The criteria are people who have earned an income of more than $200,000 ($300,000 with a spouse) in each of the last two years or have a net worth of $1 million or more, not including a primary residence. There are some alternatives for those who don’t meet the requirements.
4. Fixing and flipping properties — This is an appealing option for those who want to buy cheaper property and have money left for significant improvements in order to recoup their investment and also make a profit. Keep in mind, there is more to this strategy than what you typically see on HGTV. It’s important to know what you’re getting into and to make sure you can make affordable improvements and still come out with a profit.
If you think you’re ready to invest in real estate, but your credit
isn't where it needs to be, you may want to consider enlisting the help of a reputable credit repair company
. This can help you get a clearer picture of your credit and address any of the issues that may be damaging your credit score.