I wrote an article last week about creating big goals. I think goals are extremely important for investors and anyone who wants to succeed in life, but if I had to start all over as a real estate investor, goals would not be my first action. My first action would not be education or finding a mentor, although these are extremely important. My first action would be to talk to a lender.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
Why Talk to a Lender First?
If your reading this article you already have some idea you want to be involved in real estate investing in some manner. I would estimate 99% of the people on BiggerPockets want to be able to buy an investment property of some type at some time. The other one percent are pretending to be investors, but are actually trying to sell something. If you are an investor looking to buy investment properties you will most likely need financing. Very few of us are coming into real estate investing with $1,000,000 in cash ready to spend. Even if you have enough cash to buy a property without a loan, I think leverage is a wiser move as I described in this article. Getting a loan on an investment property is not always easy to do and sooner you talk to a lender the sooner you can get started investing.
What If I Know I Can’t Get a Loan?
If you know you can’t get an investment property loan right now, then it is even more important you talk to a lender ASAP. You need to know exactly why you can’t get a loan and what you need to do to fix it. Ignoring the problem and hoping it will magically fix itself will not work.
If you have a credit problem a lender can tell you exactly how bad it is and what your credit score needs to be. The lender can even help you contact a credit counselor or someone else who knows how to raise credit scores as quickly as possible.
If you don’t have the money for a 20% down payment, you still need to talk to a lender. For one thing you can get started with less than 20% down, especially of you can occupy a house for a year. If you do need to put 20% down or 5% down or 10% down, you will have more costs than just that down payment.
When you get a loan the lender will charge you an origination fee, recording fees, flood certificate, prepaid interest, insurance and possibly an appraisal. These costs are called closing costs and are typically about 3% of the loan amount. A lender can tell exactly how much these costs will be and prepare you for what you will have to spend.
You Need to be Pre-qualified for a Loan as Soon as Possible
There is a chance that you think you can’t qualify for a loan, but you actually can. This would be a great surprise, but how would you ever know if you don’t talk to a lender?
If you think you are anywhere close to buying a property you need to have a pre-qualification letter from a lender. Almost every REO and short sale is going to require a pre-qualification letter before they will even consider your offer. Our market is extremely competitive right now and if you have to wait for that letter you could easily lose a great deal to another investor who was ready.
If you think pre-qualifying is going to be a piece of cake, think again. The lender will pull your credit report and you must have verifiable income with a decent debt to income ratio. You need to do this right away to make sure there are no surprises.
You also need to get pre-qualified to see how much house you can afford. You don’t want to spend 2 months looking at $200,000 four-plexes if your lender is only going to qualify you for $120,000.
Lenders Know People
One of the most important aspects of real estate investing is networking. You need to have a great team out together to help you be successful. That team can include lenders, real estate agents, attorneys, title companies, property managers and other investors. Most lenders talk to multiple people in those fields every day! If you talk to a lender and let them know you are in the market to buy houses, they may connect you to some key people to help you out. If you get a loan through that lender, you are making them money.
Setting Goals After Talking to a Lender
Once you talk to a lender you will have a clear idea of how much money you will need, any repairs to your credit that need done and how much house you can afford. If any of these things are way out of whack from what you believe, you need to know as soon as possible. A change in the amount you can afford could completely change all your plans and what actions you need to take. Talk to a lender right now and make sure your plan is in line with reality.
Once you have an idea of what you can afford, how much money you will need and when you will be able to buy, you can start setting goals. You can set goals for savings, for what type of investment you want to buy and how many you want to buy. Once you get those specific amounts, properties and dates in mind it will help you achieve your goals faster.