Mortgages in St. Louis and Real Estate Investing
By: Kiara JohnsonReal estate has produced many of the worlds’ wealthiest people, so there are plenty of reasons to think that an investment property is a sound choice. But like any investment, it’s better to be well-versed before diving in. Arm yourself before starting a new career as a real estate investor.
If you’re ready to borrow for a residential investment property, these tips can improve your chances of success:
Make Sure It’s for You
Do you know your way around a toolbox? How are you at repairing drywall? Or unclogging a toilet? Sure, you could call somebody to do it for you, but that will eat into your profits. Property owners who have one or two homes often do their own repairs to save money. If you’re not the handy type and you don't have lots of spare cash, being a landlord may not be right for you.
Your first property will consume a lot of your time as you learn the ins and outs of being a landlord. Think of it as another part-time job. Do you have the time?
Pay Down Debt First
Savvy investors might carry debt as part of their investment portfolio, but the average person should avoid debt. If you have student loans, unpaid medical bills, or have children who will soon attend college, purchasing a rental property may not be the right move at this time.
Down Payment
Investment properties generally require a larger down payment than owner-occupied properties, so they have more stringent approval requirements. The 3.5% you put down on the home you currently live in, isn’t going to work for an investment property. Since mortgage insurance won’t cover investment properties, you’ll need to put at least 20% down to secure traditional financing. If you can put down 25%, you may qualify for an even better interest rate. When looking at a two or four-family property, the down payment requirement can be even higher: 25% - 30%.
Beware of Higher Interest Rates
The cost of borrowing money might be cheap right now, but the interest rate on an investment property will be higher than traditional mortgage interest rates. Remember, you need a mortgage payment that’s low enough so that it won’t eat into your monthly profits too significantly. The bigger the risk, the higher the rate.
Income varies
Tenants come and go, and it may take a while to rent out a recently vacated unit. If the unit needs substantial repairs or rehabbing, it will reduce your income even more. Furthermore, you'll still have to pay the bills, including mortgage, property taxes and insurance.
Calculate Operating Expenses
Overall, operating expenses on your new property will be between 35 percent and 80 percent of your gross operating income. If you charge $1,500 for rent and your expenses come in at $600 per month, you’re at 40 percent. For an even easier calculation, use the 50 percent rule. If the rent you charge is $2,000 per month, expect to pay $1,000 in total expenses.
Get a Low-Cost Home
Start small. While repairs present a challenge, so can buying a larger property than you're ready to handle. Starting small – purchasing a single apartment, condo or duplex, for example – can help you get grounded in the idea of investing in real estate and decide whether it's really the right step for you. The more expensive the home, the higher your ongoing expenses will be.
Find the Right Location
Look for low property taxes, a decent school district, a neighborhood with low crime rates, an area with a growing job market and plenty of amenities like parks, malls, restaurants and movie theaters.
If you have any questions or comments regarding investment properties or this article, please contact Kiara Johnson, NMLS# 869292, at kjohnson@firstintegrity.com or 314-568-6389.