Historically, real estate has been one of the best performing and most reliable asset classes available to individual investors. For some people, real estate investing is about owning a home and building equity instead of paying rent every month. For others, it’s about maintaining a portfolio of different rental properties, each of which is capable of generating revenue in excess of its own monthly expenses.
Regardless of whether you’re purely interested in becoming a homeowner for the first time or you dream of eventually becoming a real estate mogul, beginning your journey in real estate investing begins with a single purchase.
The question then is, how much capital do you need to start investing in real estate?
Factor One: Market Prices
The first thing you’ll need to think about is the local market. Across the country, the real estate market tends to ebb and flow, with prices gradually increasing and gradually falling in different patterns, usually in response to broader economic conditions. Economic growth, low interest rates, and international peace tend to be associated with rising prices, while economic downturns, high interest rates, and international conflict tend to be associated with falling prices.
Additionally, prices fluctuate in local neighborhoods in response to local pressures. If a neighborhood is benefiting from lower crime rates, improved schools, new employment opportunities, and interesting amenities, you can expect prices to rise in that area. There may also be excellent buying opportunities in struggling neighborhoods with potential to grow in the future.
No matter what your budget is or how much capital you have, there are probably buying opportunities for you somewhere – but not all of those opportunities are worth pursuing. Just because you do have the capital to purchase a house doesn’t mean you should; keep this in mind.
Factor Two: The Down Payment and Closing Costs
Next, you’ll need to think about the down payment you want to make. There are several factors you’ll need to consider when making this decision, as there isn’t a standard practice for what down payment you should provide – though there are some notable thresholds that can help you find the right down payment strategy for your situation.
For example, it can be advantageous to purchase a property entirely in cash. Doing so eliminates the need to secure financing, which can be a major hurdle if you have a low credit score or lots of existing debt. It also eliminates interest from the equation, allowing you to own the property outright without having to make a monthly mortgage payment.
It could also be advantageous to purchase a property with a down payment of at least 20 percent of the purchase price, as doing so typically eliminates the need to pay for private mortgage insurance (PMI). While this is a relatively small monthly expense, it’s a non-negligible one. Eliminating it can save you hundreds to thousands of dollars over the lifetime of your loan.
For most property acquisitions, the minimum down payment is 5 percent, though you may be able to qualify for a special minimum down payment of 3 percent. If this is the case, and you’re interested in buying a $300,000 home, you may be able to purchase it with as little as $9,000 in liquid capital.
If you do get a loan, keep in mind that you’re going to need some additional capital to cover closing costs and expenses related to finalizing the home purchase. For example, you’ll need to pay for a home inspection (which is usually a few hundred dollars), closing costs associated with your lender, and any repairs necessary to make the home habitable.
Factor Three: Management Capital and Emergency Funding
Having enough liquid capital to purchase the property is a good start, but it’s not enough to follow through with the transaction. You’ll also need ample capital on hand to serve as management capital and emergency funding.
As a property owner, whether you’re residing in the house or renting it out, you’re going to be responsible for taking care of ongoing maintenance and necessary repairs when they arise. Depending on the condition of your home and how well you take care of it, this can amount to one percent of the home’s value every year or more. Make sure you have at least this much money on hand to cover those expenses.
It’s also prudent to have extra capital to serve as an emergency fund, or a buffer that can help you meet your ongoing expenses if your income is ever disrupted.
With all three of these primary factors in mind, you might be financially ready to buy a house with even a few thousand dollars in your bank account – or you might need hundreds of thousands of dollars to achieve your goals.
Additional Financial Factors to Consider When Buying a Home
There are other financial factors to keep in mind when buying a house as well:
- Income/revenue. How much money are you making each month and how stable is that monthly income? This is especially important if you’re going to make a monthly mortgage payment.
- Monthly expenses. Consider insurance, property taxes, and other monthly expenses associated with the property as well.
- Personal risk tolerance. Different people tolerate different levels of financial risk; does buying a property make sense for you, personally?
Are You Mentally Ready to Buy a Home?
And, of course, finance is only one side of the equation. You’ll also need to consider whether you’re mentally and emotionally ready to buy a home. Becoming a homeowner may be accessible, but it’s still risky, stressful, and demanding. Property acquisitions are tough to navigate, especially if you don’t have much knowledge or experience to guide you.
That’s why real estate agents exist. We’re here to help you understand your goals, understand the property buying process, and ultimately make the best decision for your needs. If you’re ready to start looking at properties, or if you just have a burning real estate question you want to ask, contact us for a free consultation today!