While TV shows on buying investment properties make it look easy, becoming a real estate investor can be a trap for the unwary. Here are several things novice investors should be aware of.
Pick a Niche: When you’re new to real estate investing, you’d be wise to start small and pick a niche where you can develop your investment property owner skills. Get your feet wet on one or more smaller properties before tackling a bigger and more complicated investment. Consider everything from a single family home to building a rental apartment in the basement of your own house.
If you’re in a position to acquire a two-family unit or mixed-use property (with a business on the ground floor and living quarters above), you can live in one unit and rent the other. The tenant may pay a portion or all of your mortgage and maintenance costs.
Do Your Homework: Once you’ve decided on your niche and found just the right property in the right location, conduct due diligence before buying, to ensure your investment is sound. Most importantly, work with a good real estate agent who has experience in investment properties, knows the neighborhoods you’re considering, and is familiar with applicable bylaws.
Do the math: Before you buy, crunch the numbers to be sure you can afford it. Factor in the cost of repairs, overestimate the total cost, and underestimate the payback. Remember, your rental could be vacant for some time between tenants, so plan ahead for the reduced income.
First-time home buyers may benefit from a new program from the Department of Housing and Urban Development (HUD). In order to make its loans more accessible to U.S. home buyers, HUD has introduced a new FHA program: Homeowners Armed with Knowledge (HAWK).
The HAWK program, which is slated to start October, 2014, will offer incentives to first-time buyers who participate in home counseling and financial education classes. Counseling classes will be taught by agencies approved by HUD. The formal classroom sessions will focus on helping participants overcome obstacles to buying their first home.
There will be fees for the counseling, which could be paid by the counseling clients themselves, as well as by FHA approved lenders and governmental sources. The National Association of Realtors has expressed concern that the fees might be too high for some clients.
According to the FHA, first-time home buyers who participate in counseling are 30 percent less likely to default or have delinquencies than those who do not undergo counseling. By reducing delinquency numbers, the FHA hopes to rebuild its reserves and potentially lower mortgage insurance premiums (MIPs) for all FHA borrowers.
Under the program, borrowers who take six-hour counseling classes before contracting to buy, and complete one additional hour of counseling before finalizing their purchase, can earn a 50 basis-point reduction in upfront MIPs when obtaining FHA mortgages, plus a 10 basis-point reduction in their annual premiums. Upfront MIP is 1.75 percent of the total loan amount, while annual monthly premium costs are 1.35 percent.
Homeowners, who complete both counseling sessions, as well as an individual post-purchase session, and who, within the first 18 months of their loan, avoid a 90-day delinquency, will earn an extra 15 basis-point reduction in their FHA insurance premiums. Borrowers who participate in the HAWK program can save an average of $325 per year or nearly $10,000 over the duration of the loan.