In the previous post Use Your Tax Refund to Start Your Real Estate Journey, I covered everything I recommend that you do BEFORE you began purchasing your first property.
Hopefully, you listened and did your due diligence (if you need a refresher click here).
There are many pros to buying investment properties but my top 3 are:
Investing in real estate creates residual income, which is a monthly cash flow.
Having a mortgage is a good debt to have on your credit.
When you own property, you can use it as leverage for future investments.
The first step in obtaining your first property is making sure you fit the criteria. Just as you have to do your due diligence before investing, banks have to do the same before being able to give you a mortgage.
Before you began looking for a mortgage there a few things you need to have so that you meet the general qualifications banks have.
2 years of tax returns
Steady work history
A credit score of at least 580
A savings account
The amount of money you need in your savings all depends on the type of mortgage you’re looking to obtain.
Once you fit the criteria and you have the documents to prove it, it’s time to find the perfect mortgage type for you.
There are 3 different types of loans that could help you acquire your first property; an FHA or FHA (203)k loan, a Conventional loan, or an Acquisition & Rehab loan.
Keep in mind mortgages aren’t one size fits all, so you want to be sure you’re choosing the best one for YOU.
Here are some things to keep in mind when choosing your mortgage type:
An FHA or FHA(203)k loan requires a lower down payment compared to other loans and counts as a first time home buyer mortgages. With the FHA or FHA (203)k multi-units qualify, so you’re able to purchase a duplex, triplex, or quadruplex. If you purchase a multi-unit property you can live in one unit and rent out the rest. Taking this approach allows you to live for free and create residual income. Once your property becomes income-producing it is considered an investment.
A conventional loan requires you to have more money on hand and better credit. This mortgage is good for someone with no experience with contractors because you can purchase a property that is turnkey ready, meaning it doesn’t need any rehab. For example, If I buy a property that is $100k, the mortgage is going to be about $700 a month. I can then rent out the house for $1200 a month which automatically will make this an income-producing property.
An acquisition and rehab loan is for those with more money on hand, better credit, and more experience with contractors. If you are your own GC, this mortgage can make you money. For example, if the bank pays $50k for rehab but as the GC you only spend $40k, that extra $10k goes straight into your pocket.
(To learn more about different mortgages click here)
Once you’ve decided on the type of mortgage you would like to have, it’s time to get pre-approved. Thankfully in step one, you did your due diligence so getting pre-approved will be a breeze.
Getting pre-approved is important because you’ll know what kind of home you can actually afford. There’s nothing worse than house shopping and then later finding out you can’t afford the home of your dreams. This is the final step before you should start working with a real estate agent.
During this phase, you’ll want to meet with different banks and learn about their mortgages and all of the fine print included. Be sure to do your research as well. You’re also shopping around at different banks because you want to be sure you’re getting the best deal and interest rate possible.
Now that your budget and funding it’s time for the fun part, finding your new property!
House shopping can be stressful if you’re doing it alone, and that’s why I recommend finding a realtor. Before choosing an agent make sure you casually interview them; this will ensure that there’s an understanding of what you’re looking for and also you want to ensure that they’re able to give you the time and attention you need. Personally, when it comes to realtors I like to work from referrals.
As a home buyer, you do not have to pay a commission rate to your agent, however, there usually is a transaction fee that ranges anywhere between $100 - $500.
But here’s a little secret… as a licensed real estate agent I don’t charge that fee (wink wink.)
If you have any advice for first-time homebuyers leave a comment below. And if you have any questions as a first time home buyer, leave a comment below. I'm just here to help, and if you want to help out a friend feel free to share this article!