Investing in real estate has quickly become one of the safest and most effective ways to achieve financial success in this country. And because of that, thousands of new investors enter the business every year. They have some money and good credit, but what most of them don’t have is knowledge. Make no mistake about it, real estate investing is serious business and if you don’t know what you’re doing, you could lose a lot of money doing it (not to mention ruining your credit for years to come). Now, different things work well for different investors and different areas, but here are some general steps you’ll want to keep in mind before you decide to dive into real estate investing.

Step One: Clean Up Your Finances

Like it or not, you have to maintain good, solid credit to get into and stay in the investing business. When financing investment properties, whether residential or commercial, you are seen as a businessman and lenders will want to know how financially responsible you are. Your credit history is a direct reflection of that financial responsibility. If you haven’t been responsible enough to take care of your personal finances, why would any lender (conventional, hard money, or private) believe that you will be financially responsible enough to make the proposed business investment work? This may sound harsh, but it is exactly how lenders will view your loan application. So get your credit reports and make sure they are as accurate as possible. Pay any and all fees, bonds, lawsuits, etc. If you filed for bankruptcy in the past, then that bankruptcy must have been discharged or dismissed for at least 36 months and you must have built up some credit since then (usually 3-4 credit accounts currently open for at least 24 months). with an excellent payment history.)

Make sure you own your own home (especially if you’re a new investor).

Finally, you need to make sure your median credit score is 660 or higher for residential investment property and 620 or higher for commercial investment property.

Step Two: Gather Your Documentation

Almost all lenders will require some form of documentation of employment, income, and assets. Some of the documentation you want to have available includes:

• Your W-2s or completed tax returns for the last two years.
• Your last 2-3 bank statements and pay stubs.
• Your business license or a CPA letter from the last 2 years.
• Copies of your current lease agreements, if you already own rental properties.

Step Three: Have Some Cash On Hand

There are numerous financing options that will allow you to purchase your investment properties with little or no down payment. In fact, it is highly recommended that you always try to buy your investment offerings with as little out-of-pocket money as possible. It’s a concept known as “leverage.” The idea is that the less out-of-pocket money you put into an investment deal, the higher your rate of return will be.

But what happens after the closing table? How do you make the monthly payments on the house you just bought? This is where your existing available cash comes into play. Regardless of how you work your investment property deals, it is highly recommended to have at least enough cash on hand to cover your 6 month mortgage payments. In fact, most lenders will require this as part of your loan qualification. Think of this money as your company’s “hard day” fund. Use this money to pay for potential problems with your investment properties, such as going over budget on a rehab, not being able to sell or rent a property in a timely manner, or losing a tenant without notice.

Step Four: Put a network of professionals together

Although you may not use them all the time, it’s a good idea to develop a network of real estate professionals to work with. Make sure everyone has real estate investing experience and understands your business. Some professionals you may want to include in this network are: a real estate agent, appraiser, mortgage broker, general contractor, accountant, and real estate attorney. It will take time to build a network of trusted people, but having them often can be absolutely essential.

Step Five – Get your financing approved before you start shopping.

I cannot stress this enough. There are nothing but advantages to getting your financing approved before you pursue your investment deal. Regardless of the type of financing you prefer to use, knowing what you can afford to buy and what your options are before you start bidding on property will allow you to focus on negotiating the best deal for you and your business and win big. smoother transaction.

Now when I say approved, I mean a full credit approval. This means that an underwriter has reviewed your loan file and her credit and has issued a conditional approval based on your credit, employment, income, etc. This approval will reveal the maximum loan amount you are approved for, interest rate, terms, etc. Conditions will include finding an acceptable home to use as collateral, doing a reliable appraisal, etc. Don’t confuse this with a worthless “pre-qualification” where the loan officer or mortgage broker simply says “we think you qualify for this loan, but we haven’t really looked at it yet.”

Step Six: Plan Ahead

Plan your business from start to finish. When looking at a potential property, start to form ideas of how you are going to use it. How is your business going to make money? Do you plan to rent it? Repair it and resell it? How long do you plan to keep the property? What if you can’t rent or sell it when you want? By the time you meet with your mortgage professional, you should have a good general answer to all of these questions. Research your prospective properties and the neighborhoods that surround them. Is the area desirable for renters and/or buyers? Are market values ​​in the area stable, are they going up, down? Is there any major construction planned for the area, such as roadworks, industrial centers, parks, etc., that could have an effect on the desirability of the area and home values? Bottom line, know as much as you can before you buy, because once you buy it’s yours to deal with for better or worse.

Simply put, investing in real estate is not for everyone. It is not a get-rich-quick business and it takes a lot of time and effort to get it right. It can mean some sleepless nights and many long hours of work. However, the benefits can be just as great. Many people have used real estate to become financially independent and/or to pay for their retirement. Is it right for you? Do you have the financial discipline and drive to run a successful business? That is completely up to you. Just understand in advance what you are getting yourself into.