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Assess Your Finances

Before Investing in Property, You Need to Assess Your Financial Situation

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It is very important to assess your financial situation before you make an investment in property. This will help you determine the property price range you should be considering, as well as if you need to get started raising money from outside sources in order to make the investment.

Assess Your Funds

Investing in property requires money, so you will need to examine your finances before you invest. How much debt do you have? How much money do you have saved? In addition, how much discretionary income do you have each month?

If you have enough money on hand, then you will not have to worry about obtaining financing, or you should not have a hard time obtaining financing as long as you also have good credit. If you do not have enough money on hand, you will have to use your brain to find creative ways to come up with the capital, or to buy the investment without having to put as much money down.

Assess Your Ability to Obtain Financing

The great thing about real estate is that you don’t need to have the entire purchase price yourself in order to buy a property. You can use leverage to buy property that you would not have otherwise been able to afford. You can get a loan for the difference between your available funds and the purchase price. The loan can come from a variety of sources such as conventional banks, hard money lenders, private lenders, or even from the seller.

However, to get financing from a conventional bank for an investment property, you will typically have to have decent credit, a business plan that outlines what you will do with the property, be investing in a property that at most only needs cosmetic repairs, or be building new construction. Do you know your FICO credit score?

If you do not get a conventional bank loan, you will have to use your creativity to find and structure seller financing deals, subject-to deals, or other types of little-to-no-down-payment purchase strategies. You could also go the route of private investors such as hard money lenders, friends, family, or business colleagues.

The requirements for obtaining these unconventional types of mortgages will vary depending on the source, but often, your credit will not necessarily be the most important factor. Rather, the property itself, your experience and your business plan for the property will be the most important underwriting factors.

Do You Have a Cushion?

Another important consideration is to make sure you have a cushion if your investment fails. Are you putting every dime you have into this investment? Are you comfortable taking that big of a risk? Do you have enough money to pay for the "soft costs" such as your mortgage payment, taxes, and insurance, while your investment property is sitting vacant? What happens if you cannot find tenants immediately, or cannot flip the house immediately, and the property sits vacant for three months, six months, or even a year?

If you invest in property without enough reserve funds, you could potentially damage your credit with late mortgage payments or a foreclosure, as well as run the risk of losing the property and all of the funds you have invested. Investing in real estate can be very lucrative, but, like any investment, there are risks involved, and not having proper reserves could spell disaster.

Next: Be Educated About Property Investing

Back to: The ABC's of Property Investing

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