Real Estate Investing: Getting Started and Testing the Waters

 

With interest rates now as low as 3.875%, for a 30 year fixed home loan, I recently decided to entertain the idea of investing in real estate. The main appeal in dividend investing, as it pertains to early financial independence, is to create a passive income stream that generates enough cash flow to exceed monthly expenditures. When investing in stocks, one of the first rules that is taught is to diversify your portfolio, touching base in enough different industries and companies so that you don’t put all your eggs in one basket. From a broader perspective, then, it would seem to make sense to further diversify your investments, so that you aren’t fully invested in just the stock market. Real estate investing seems to be a logical complement to a standard stock portfolio. The following outlines the many similarities between the two styles of investing – In general:

Dividend Investing:
-Fixate less on the stock price; focus more on the dividend payout instead

-Invest in companies with a strong economic moat

-Invest in proven industry leaders

-Look for companies with a history of increasing dividends

-Buy low

-Buy and hold (infrequent trading)

Real Estate Investing:
-Fixate less on the property value; focus more on the monthly rent payout instead

-Invest in desirable areas (nearby companies, schools, transportation, etc.)

-Invest in areas with steady/growing population history

-Look for areas where rent keeps up with and beats inflation

-Buy low

-Buy and hold (not buy and flip)

When looking for a type of housing to invest in, there are many different options – single family homes, townhouses, condos, etc. The main objective, though, is ALWAYS to make a profit. It does not make sense to invest in any property, no matter how much a bargain it may appear to be, if your monthly mortgage payments exceed what you can generate in rental revenue.

The first step, prior to going house hunting is to get a pre-approval letter from a bank (lender). Before going to your bank, make sure to bring the following documents with you, as they will be looking for:

Items to bring:
-Most current pay stub

-Last 2 years of W-2 forms

-Account to verify you have sufficient funds to meet 20% down payment (I brought in a statement showing my account value in stock equities, but they dismissed this; they want to see the funds in a traditional savings/checking account)

This letter lets the seller and agents know that you are serious, and can afford to make the monthly payments. I chose to work with Wells Fargo, which pre-approved me for $400,000. My credit score was 760, placing me in a top tier bracket that qualified for the lowest interest rates. FICO credit scores range from 300 to 850, the higher the better.

Although I did not obtain the highest score possible, the lender assured me that my credit was superb. This came as a bit of a surprise to me, since this was my first time checking my credit score, and I had no idea how high or low it would be. The secret to obtaining a high credit score? Pay your bills on time! That’s basically it. I’ve never made any concentrated effort to try and boost my credit, so this is the only thing that I’ve been making sure to do right. Other than that, I have 3 credit cards and each one has a credit limit that ranges between $3000 to $10,000. I carry no debt and am not currently using credit cards to do any type of financing. I simply make sure to pay them off on time every month.

Through the early part of my search, I managed to locate a rental property that caught my eye. The property was a 4 bedroom, 2.5 bathroom condo. It was located in a good area that was close to a high school, was very reasonably priced, and did not need much, or any fixing up. I was intrigued, and contacted a real estate agent (found online) to arrange a time to see the house. After checking out the place and finding the conditions favorable, I felt comfortable enough to make an offer that day. Prior to the meeting, though, I made sure to run the calculations and make sure that the numbers made sense. Here is the breakdown:

Costs:

Mortgage: $865.00
HOA: $285.00
Property Tax: $212.00
Insurance: $30.00
Vacancy Allocation: $54.00
Maintenance Reserve: $26.50

Total = $1473.00

Monthly rent that could be obtained was estimated to be somewhere between $1800 to $2000 a month. This would yield profit ranging between $327.50 to $527.50 per month. Over the course of one year, this would amount to $3930 to $6330. At the purchase price of $230,000, the down payment would be 20%, or $46,000. This represents a yield between 8.5% to 13.7%. Not bad! Though I may be overlooking some hidden costs. I also have to remember to set aside enough funds to get through inspection and closing. Property management would be handled by me.

The property I am bidding on is banked owned. I have also been informed that there are multiple buyers at this time. This is probably due to the fact that the Spring and Summer months are prime buying seasons, which depletes inventory. So, this could easily turn into a bidding war, which is the last thing I want to get into. The bank is currently reviewing offers and deciding on which one to accept. At this point, there is nothing more than I can do. Unlike buying stocks, there can only be one winning bid! I just have to wait patiently, and hope for the best 😉

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Wow, what a nervous time. Good luck with the bid!

I think the word “ignore” in your definitions of stock and real estate investing is too strong. I know what you’re driving at (as I’m sure other readers do, too), but you never ignore the purchase price. In many markets the price is driven up because so many people are seeking the rental income or dividend.

Have a great weekend!

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[…] the kick in the pants I needed to get up and go do something about it! Beginning in May 2012, I was on the hunt for my first rental property. I lucked out, and was able to win something that cash flowed reasonably well in July. Feeling […]

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[…] made a “not-so-aggressive” offer for a rental property and quickly learned how competitive things were becoming; as if overnight, everyone got a hold of […]

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