submitted by Sharon Brewer
You probably know somebody who’s made a small fortune investing in real estate. And whenever they bring it up, you roll your eyes but also wish you could follow in their cash-laden footsteps. So why don’t you? Most likely because you’re not sure you have enough disposable income to invest – after all, even a small down payment can be tens of thousands of dollars. Well you can stop wondering, because here are the three questions that will clear things up.
1. Can You Afford a 15-20% Down Payment?
After the financial crisis of 2007, a 15-20% down payment is quite common in many areas of the country. Some lenders will go as low as 10%, but those loans will have high variable APRs, making them a riskier investment, especially if it’s your first foray into the real estate world.
So take the price of the property you’d like to purchase and divide it by 5. If you can cough that up no problem, then you probably have your answer.
2. Where Are You in Your Financial Journey?
If you can’t afford a hefty down payment, but you’re young, a high-earner with few other obligations, it may well be worth the risk. Or if you don't have a lot of available cash but have built up a lot of equity in your primary property, you might consider tapping into that and leveraging it for your next investment.
However, if you’re nearing retirement and wanting to sure up your nest egg, taking on a high-interest mortgage probably isn’t advisable. That said, there’s no one size fits all solution, which is why seeking third-party guidance is so helpful.
3. Can You Manage a Rental?
While some plan to buy and quickly flip the property, most forays into the real estate world start with rental property. But before you take up your new role as landlord, ask yourself – do I have time for this? The question shouldn't scare you off, but it should make you pause. And if the answer is no, that doesn't rule you out either. For around 10% of the monthly rent, you can hire a management company to take care of the details for you.
Whichever way you go, this decision ultimately comes down to whether or not you'll trust other people – tenants and management company alike – to care for your new investment.
So maybe you’re ready to invest and maybe you’re not. Either way, it’s better to know where you stand than to keep on wondering. And if it’s not the answer you were hoping for, don’t despair. Consider setting up a meeting with a financial professional who can you help figure out how to get to your bigger, better future.