Building Your Real Estate Portfolio: Part 1 Getting the Home Purchased!
So you have read some of my previous blogs and you feel like you want to get started in real estate. Well, there are a couple of ways to get started. In my experience the way most people get started has very little to do with a “free seminar” where seating is “extremely limited”. Most of these “seminars” I would compare to the traveling snake oil salesman of old. What they have will cure everything and solve any problem. You can make tons of money without using any of your own and its risk free!!!! Yeah, not likely!
The real way that many start to get involved and often the easiest way to gain entry into the world of real estate is to purchase your first house. If you are looking to buy a house and you also know that you want to fix and flip or get a portfolio of rental properties, you may as well start with your personal, owner occupant house. You see banks have no problem lending you money to buy a house you are going to live in. It is in most circumstances the easiest loan you will ever get and you have the most options, VA, FHA, FHA 203K, conventional, or any number of “first time home buyer” type products. The one you choose is the one that best suits your plan and personal situation. Even better is that you will get a lower interest rate on an owner occupant purchase than an investment purchase and most lenders will allow between 6 and 10 owner occupant loans.
VA, FHA and most “first time home buyer” loans (which almost all run through FHA underwriting) are great products but if you are handy and want a property that needs a great deal of work, then an FHA or VA loan is likely not going to get you the property you want. Those loan programs will not allow you to purchase a house that needs a ton of work. They will however get you in with the least amount of money down and sometimes that is what you need. You need a place to live and that is the first home investment step in what can be a life long process. The one sort of loophole to this is to buy a house that is very dated and priced accordingly. The FHA and VA loans don’t care that the house is dated, they do care that everything is there and that the house is livable at the time of purchase. You will want to make sure that you have a VERY knowledgeable realtor if you are thinking about going this rout. If they do not know tons about the process and about houses and maintenance you could be risking your earnest money, not to mention the cost of an inspection and an appraisal!
You will have a great deal more flexibility with an FHA 203K. FHA 203K allows you to purchase a house that needs lots of work but the work has to be done rapidly right after the purchase and the money for the repairs are rolled right into the loan and earmarked for the repairs. This process has some pluses and some minuses. The plus is that the home can be in pretty tough shape and you can still get it bough and fixed. One draw back is that often you will likely need to hire a contractor to do the work and this can eat up a lot of the potential profits. The loan itself also has quite a bit of extra work involved in the process. Lastly you will need to qualify for the entire loan amount of the purchase price and repairs. This can be restrictive if you have a high income to dept ratio, or need to max out your loan amount just to get into the market.
A conventional loan will be your best bet for purchasing a home that needs plenty of work and has lots of sweat equity. Be aware that the house still can not be in terrible condition unless you are putting TONS of money down, and even then you may find road blocks. Lenders want you to purchase a home that they can sell if you do not make your payments. A burned out hole is hard to sell! Again you should find a real estate pro that knows the process and can make sure that your loan will go through and reduce the risk if you loosing your earnest money.
The last and highest risk way to purchase a property is with a Hard Money Loan. These are loans that are generally not based on the credit worthiness of the borrower but on the value of the asset. They vary a great deal from institution to institution or lender to lender. Often times these are a group of investors or a single person that want to make a large return on their money and are willing to take bigger risks than most standard investment vehicles. Often you will need to put down a large chunk of funds up front, pay multiple points up front, carry very high interest rates and they are short term (often not longer than 6 months). If you are buying the home to live in this is probably a bad option.
More on this subject to come!