Where Will Your Next Deal Come From?
Hundreds of new investors hit the real estate market every day. In fact, it’s one of the reasons I love real estate: anyone can do it. You don’t need a degree or a special license to get started. As long as you have the motivation and drive to succeed, there are opportunities to be had. However, which opportunities are best for you is often a point of great confusion and frustration. Most of this is based on your local market and the amount of funds you have available. There are also additional options based on your long term goals and your real estate skill set. If you are looking to close your first deal, here is some advice on how and where to get started:
Types of Financing
FHA: All purchases start with financing. Before you look at a single house, you need to know what you are approved for. Inside the real estate business you have multiple financing options. You can look to partner with someone who has funds they are looking to invest; a private lender if you will. You can also tap into the many hard money outlets that are now available. If you are looking to finance the property, you either need your own capital or a lender’s funds. A great way to get started is by taking advantage of an FHA loan program. FHA (federal housing administration) offers programs for owner occupied properties with as little as 3.5% down. They allow as much as 3% of the closing costs and prepaid taxes to be paid by the seller. Combining both options can get you into a new 1-2 unit property with minimal down payment.
203K: A 203K is another loan product offered by the FHA. This program takes on many characteristics of the program above, with one stark difference: With a 203K, the borrower is allowed to use up to $35,000 for repairs on the property. This amount is simply added to the loan after the completion of the work. This works well for investors who lack the skill set or the funds to do the repairs themselves. These loans take a bit longer because of all of the moving parts and work associated, but can be a great way to enter the business.
Types of Properties
Distressed Properties: Some of the best deals you will find are with properties that nobody else wants. When you are just starting out, you need to find value wherever it presents itself. Often times, this means making offers on properties that at first glance may seem horrifying. These are the properties you look at where there is debris ankle high or a smell you can pick up as soon as you walk in. While you may not want to live there, these properties often have great value. Fixing cosmetic items are easy fixes that yield big results. If you are handy and can do these repairs yourself, the higher the upside will be. Between short sales, foreclosures and auctions, there are a handful of distressed properties in every market.
Duplex: A duplex is another way of saying multifamily property. A great way to enter the business is by combining an FHA loan product to purchase a two family property. You can live in one side while renting out the other unit. Having a tenant should cover most, if not all, of your monthly mortgage payment. You will also gain valuable experience as a landlord and property manager. Having your tenant in the same building will give you a front row ticket of this side of the business and give you an idea of whether or not it is for you. It will also provide you with cash flow and accelerate paying down your mortgage.
Mobile homes: For the real estate investor, mobile homes, or modular homes, are something of a commodity; at least in the right market. These are much smaller units that are typically part of an association. They are fixed to the ground, and not mobile at all. They are very much like condominiums in the way they are structured. The biggest difference is that they are often much smaller than the average condo. These can be an attractive starting point, given their reduced price point for entry. You probably won’t retire after your first mobile home deal, but there may be profits to be made. At a minimum, you can learn some valuable experience as to how the process works and what it entails.
Most investors slowly work themselves into the business until they are comfortable with the market and the process. There are many different ways to find your first deal. What has worked for someone else may not work for you, and vice versa. It is important to remember that getting started on a bad deal is far worse than not doing anything at all. When you are comfortable, look for a deal that is the best fit for you and go from there. Your first deal sets the tone for your business. Make it one that you can be proud of.