Real Estate Investing for the Young or First Timers

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• Owning vs Renting
• Home Owner vs Investor
• Who can buy
• Preliminary Steps
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• Help for Becoming a Landlord
• Got Savings?
• Financing Considerations
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Owning vs Renting 

• You just landed a new job. You're getting ready to pack up your things and start new roots in a new town. The big question for you is whether to rent or to buy as you begin to plant roots in the location of your new job. The decision on whether to rent or own should be based on several factors:
  1) Length of Stay Experts say that if you intend to live in one spot for 5 or more years, then buying works to your advantage.
  2) Personal Preference Some people do not like the thought of simply turning money over to a landlord and not building any equity.
  3) Homeowner Responsibility Can you keep up the house; Afford maintenance on top of taxes, home insurance, and your mortgage?
• Buy or Rent, a young saver's dilemma - This CNN article briefly addresses the concerns of a soon to be young professional.

Home Owners vs Investors 

• HOME OWNER PRIORITIES: Home owners are purchasing a principle residence, the place where they intend to live.
  
  The most important reason for buying this property is to put a roof over your head. You want a quality place that will provide you and your family/roomates with comfort. Secondarily, property appreciation is an added bonus.
• INVESTOR PRIORITIES: Investors are spending money on an asset that will make them money. If they purchase a property, they either want it to produce positive cash flow immediately (for example: rents are greater than their expenses for the property), or the investor plans to hold the property for long term value appreciation.
• HOME OWNERS CAN BE INVESTORS: if they plan appropriately. If you do your research, starting below, you can realize the goals of being a Home Owner and an Investor at the same time. I will provide you with tips on 1) creating rental income from your first home, and 2) finding a property which will appreciate.
  
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Who can buy/invest: 

1. People in college, but are ready for the challenge of owning. You can build up your equity over four or less years and exit school with a big step up on your peers.
2. Recent college grads who have begun pursuing their professional lives and plan to be in a locale for any length of time.
3. Potential first time home buyers who are tired of giving their money away to landlords and would rather build equity.
   
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Preliminary Steps 

• CHECK YOUR CREDIT.
  Free Credit Check available here. Do not be fooled by the numerous offers online for "free credit reports", usually these are free, but simultaneously sign you up for some other service which you must pay for. YOU ARE ENTITLED TO one free credit report from EACH of the credit reporting agencies per year. To optimize your credit checks, use only one report from each agency each year, but space out the reports by 4 months. For example: get one from Equifax in January, one from Experian in May, and one from TransUnion in September. Use the link above to begin your credit check!
• WHAT IS IN A CREDIT REPORT?.
  Credit Report Explanation available here. This peice by CNN gives a good breakdown of the information you will find once you have your credit report in hand. Armed with this knowledge, you can begin your quest to better credit.
• TAKE CARE OF YOUR CREDIT. Pay off outstanding debt (for Student Loans, see below). Don't pay off debts in the order they occurred necessarily; always pay of the highest interest rates first. The best idea is to open a new credit card that allows you no interest balance transfers for one year (don't close the original credit card). You can then keep paying down your balance without incurring added interest. Make it your goal to pay off this debt within the "no interest period." Maintain existing credit lines (credit reporting agencies like to have long histories). If you do not already have credit cards/lines, you need at least two. Use your credit cards to make only purchases which you can afford to make and which you will pay off on time. Having recurring debt which you pay off on a regular basis provides a history of debt payment.
  Motley Fool Credit Advice available here.
• STUDENT DEBT. If you have student debt, you might not want to pay this off too quickly. Chances are you are getting below market interest rates. Let's say your student loans were consolidated for 4% interest and the average thirty year mortgage rate is 6.5% currently. By not paying off your student debt and applying your cash to your downpayment, you are making the best use of your debt.
• RESEARCH YOUR MARKET. Where do you intend to purchase? Make sure your expectations for this area are realistic. Understand the pros and cons of living in each area, and what each of those tradeoffs cost. Examples include: proximity to transportation, time of commute, lot sizes, house sizes, condition of property.
  
  If you are considering purchasing in the DC area, click here to begin your research.
• GATHER YOUR RESOURCES. Today there are many different financing options available (see Financing section below), but you should still have your ducks in a row. If you do not have savings, start (see Savings section below). Either you will have some money to put down yourself, you can find money through friends/family to put down, you can borrow the down payment, or you can purchase with no money down.
• PREPARE A REALISTIC PLAN. This house is not just a place to live, but it is a serious investment. You need to have a plan drawn out not just for your own understanding, but to prove to a bank or other financers that you have the ability to make this purchase. Ideally you should be able to prove your cash flow (job, renters...) and detailed listing of expenses as well as a budget for contingency items.
  
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Don't Have the Money ($$$) to Buy Yourself? 

• There is give and take in every real estate purchase. Most people do not have the millions it would take to buy their perfect piece of property. In lieu of this, you have options.
• BUY WITH FAMILY/FRIENDS: you can have a joint deed which will allow a family member/friend to make this investment with you. Make sure to have a lawyer draw up an agreement for division of assets and condition of sales prior to the purchase. No matter how good a friend or how close the family, this is necessary.
• BECOME A LANDLORD: Yes, your friends and coworkers are going to need a place to live too, and why not with you? They are going to pay rent anyways, so let them live with you and their rent will help you pay your mortgage. The catch: Many banks/mortgage companies will not allow you to count rental income without a year of landlord experience. The answer: A "no-doc" (document) or "stated-income" loan - allows you to get a loan with minimal adjustments in the rate, in which you do not have to prove your ability to meet the obligations of the loan, but you simply state that you can. The extra risk for the lender means a higher interest rate, but a minor increase in the mortgage rate could be worth the extra purchasing power you gain. Plus, these renters will add to your yearly equity growth. Lastly, remember that I said one year of landlord experience??? You can always get a stated loan for a year (even an Adjustable Rate Mortgage) and then refinance.
  
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Savings 

• Savings can be very important in real estate transactions. They can be used as a down payment to secure a loan, and they can also be your safety net for the unexpected. It is great if you stretch your self financially so that you buy a good property, but it is a bad idea to overburden yourself. If you run into a problem, like a house system (plumbing, heating, electrical) breaks down, these items can have major repair costs. Not only can they make your living situation a bit costlier, but if you have roomates who rent from you, you will have to get it fixed asap.
• Cut out unneccessary items from you life. Make your coffee at home or at work instead of buying that Starbucks. Bring lunch or make dinner instead of buying. Look up fun activities that you can do on a budget. Invite friends along on weekend getaways to help share transportation and lodging costs (and you may even get a group discount). Cutting back where you can will help you increase your savings rate. Make sure to set aside a portion of every payment you receive.
• Open an online savings account. Even if you have a free checking account at one of the major banks, an online savings account can have drastic effects on your savings. The current rate on an ING savings account is 4.75% for an introductory time and then 3.6% thereafter. Many of you have "free accounts" at your bank because they pay you very little to no interest at all. Use these free accounts to transfer funds back and forth to your online bank; you'll make the most of the best interest rates available, as well as the convenience of atms and checking.
• Increase your retuns. That free checking account of yours makes you little to no money. Don't just give the banks a free loan, demand a higher return. Read this article to see how you can move your money to a higher yielding account: Increase your Saving's Returns article by Money Magazine.
• Waiting to buy? If, for some reason, you don't plan to buy for some set period, 3 months, 6 months, 1 year, etc... you can sink your cash into CDs, go here for
  some of the best CD rates. Pick out a CD that matches your time table and will allow you to maximize you earned interest while you wait.
  
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Financing Considerations 

• HEALTHY DEBT - There is such a thing as healthy debt. Many home loans can actually be very healthy, as you can maintain good cash flow while building equity. For investors, this is one of the main principles to finding good investments; using debt, the investor has more purchasing power and if the cash inflows (rent or sale) provide more value than the cash outflows (mortgage payments, utilities, etc), then the investment might be a good one to make. Read this article to see how Debt can be healthy even if you have enough money to pay for a house with cash:
  Healthy Debt article.
• TAX ADVANTAGES - As of now, the government supports the American ideal of owning your own home. When you establish a home mortgage, you are entitled to deduct any interest you pay on the home loan from your income to help find your adjusted gross income, which is the final amount you are taxed on. You can also deduct your property taxes. Many states or localities also offer local tax credits for first time homebuyers (ex: The Homestead Credit in DC) to encourage new homeownership.
• FIXED RATE MORTGAGE - Different time periods for this mortgage are available; the shorter the period, the more your monthly payment; but the rate during this time period will never change
• ADJUSTABLE RATE MORTGAGE(ARM) - These mortgages have opened doors for many people. These loans usually have a low introductory rate which stays the same for some time period (months or years) and then adjusts to the market rate on a regular basis (usually there is a cap on the amount of adjustment per time period). These loans can be great to take advantage of if you plan to have a house for a short time period or if you need this loan just to get started; but be wary. As soon as your rates adjust, you will be expected to meet the additional monetary demand immediately. Currently ARMs are very close in cost to Fixed Rate Mortgages, so a little extra expense every month may be worthwhile given the security of a consistent monthly payment.
• INTEREST ONLY - These loans provide a path to get into real estate for those who would have a hard time paying a fully amortized (principle and interest) loan. Generally, in a Principal and Interest loan you pay a fixed payment each month which is composed of both principal and interst. Since you are paying a portion of the principal every month, your total loan amount continues to decrease (until you eventually pay it in full at the end of your loan). And since your loan amount continues to decrease, the interest you owe each month decreases; this makes your principal portion of the fixed payment larger and larger. Compare that to an interest only loan, where you only pay the interest portion. Yes, your monthly payment will be lower, but you are never paying down your loan; therefore, at the end of the loan term, you still owe the total amount. If you can afford to pay the Principal and Interest, generally you should. People who benefit most from an Interest Only loan are: 1) those who could not afford to pay the principal and interest, 2) those who are purchasing for a short term investment and plan to make improvements. Read this article for a several examples and a more in depth review:
  
  Interest Only Article available here.
• DOWN PAYMENT - In the past it was customary for buyers to put down a full 20%. As home prices have increased, buyers have been able to put down less and less as mortgage companies added more flexibility. The more you put down, the less risk the lender has, so your interest rate on the loan will be lower.
• ALWAYS HAVE OPTIONS - even if your told by a broker that they have a preferred financer available, always do your research. Use www.bankrate.com to get an overview of what's out there. "Shop" around.
• MOST IMPORTANT - do not openly choose your mortgage company. After you "shop" around, you must do what I call "honest dealing" checks. Take your 2 or 3 mortgage companies that are offering you the best deal, and tell them, openly and honestly that you would like to work with them, but you have not made your decision. You will need paperwork securing your rate and deal terms prior to your closing. The reason I say this is to protect yourself. If you tell a mortgage company that you are working with them for sure, they may "all of a sudden" not be able to finance you at the terms you were told on the phone. As you approach the closing table, you will be forced into a position you do not want: accept worse terms on your financing, or lose the property. NO GOOD. GET IT ON PAPER! Also, see the link below on cutting out fees.
• REPUTABLE LENDERS - Check the following: Web sites to check for complaints against lenders include
  ripoffreport.com,
  complaints.com,
  consumeraffairs.com,
  and Better Business Bureau,
  as well as state regulatory agencies.
  
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