The biggest obstacle when investing in real estate is saving enough money to purchase the property. Buying real estate is one of the best ways to increase wealth and create passive income. Many real estate investors use the income they receive from their properties to save for retirement and to enjoy a better quality of life. It’s not easy saving enough money to invest in real estate, but the it is definitely worth it in the long run.
There are several ways to invest in real estate with little or no money down, but this article focuses on buying property the traditional way through a bank. While investing in real estate is a great investment, it usually requires a lot of money. When paying cash, it’s easy to figure out the cost of any given property, but financing tends to make things a little more complicated. Most banks ask for at least 20 percent down, and then there’s carrying costs and repairs to consider as well.
Factors that influence the Down Payment
For the beginning real estate investor, the average down payment is usually in the neighborhood of 20 percent. This means a property selling for $100,000 needs at least a $20,000 down payment. Of course, this percentage is just an estimate, as there are other factors such as credit rating that may have some impact on how much the bank requires upfront.
If you are interested in investing in several properties, it’s important to keep in mind that the more properties you own, the more likely your down payments will be hier. For instance, some banks begin requiring 25 percent down once you’ve bought four properties in your name. Should you want to invest in more properties, banks sometimes stop lending money altogether once you have ten mortgages in your name. In cases like these, using a portfolio lender helps bypass these limitations. The down payment, however, is not the only consideration when figuring out how much money is needed to investing in real estate.
Loan and Purchase Costs on Real Estate Investments
When purchasing any real estate property, closing costs and additional purchase costs add to the amount needed upfront. Closing costs, which add up to approximately three percent of the purchase price, include things such as insurance, interest, origination fees, recording fees, appraisals, tax certificates, etc. In some cases, the seller may pay all or part of the closing costs. An inspection of the property may be required as well, which adds another $250 – $500; and some sellers will not pay for title insurance, which tacks on another $500 – $1000.
Repairs and Carrying Costs on a Real Estate Investment
Whether flipping or renting out the property you’re buying, it’s smart to count on having at least minimal repairs to pay for. Minimal repairs fall in the ballpark of about $5000, but a property in major disrepair may require as much as $20,000 or more before it’s rentable. In an ideal world, repairs would be done quickly, but this is usually not the case. Repairs typically take much longer than expected, which leads to carrying costs in the meantime. Carrying costs on a property include things like taxes, utilities, insurance and interest, which will all have to be paid until you either sell the property or rent it out once the repairs are complete.
Total Capital Needed to buy a $100,000 Property
Using that same $100,000 example, the list below summarizes the amounts discussed above.
- Down payment – $20,000
- Closing costs – $3000
- Repair costs – $5000 (at minimum)
- Carrying costs – $1000
Total investment cost – $29,000
All of these amounts are estimates, and as stated before, other factors come into play depending on each person’s situation. Things such as credit rating and how many mortgages you already have in your name can increase the amount a bank wants upfront. A good rule of thumb when considering investing in real estate is to estimate high and have a cushion of funds in the bank so you’re prepared for any surprises that may arise.