May 15, 2005 — Have you been considering investing in real estate lately? Pablo in San Diego is thinking about jumping in, but he's a little concerned about the "housing bubble" he's been reading about. And he's got one other little problem: he's got a bankruptcy filling in his credit history.
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AM I CRAZY?
I have recently been thinking about investing in real estate i.e. buying a house then renting it out -- even though there is talk about "the bubble being close to bursting." I know there are areas where the market is good. Anyway, I have one major question. Is it possible to get a loan even if I filed for bankruptcy, and if so how much would I have to have for a down payment? Or am I just completely out of my mind? What do you think? — Pablo F., San Diego, Calif.
It doesn't really matter whether or not we think you're crazy. To pull this off, you're going to have to convince a lender that you're not. And the only way you'll know is by going through the process of asking them if they'll give you a mortgage. The odds are certainly against you, but there's no harm in trying.
So call a mortgage broker (or two, or however many it takes) and tell them you want to "pre-qualify" for a loan. In the old days, you had to find the house first, and then ask to borrow against it. But these days lenders are so eager to get your business, they'll let you apply before you've even started your house hunt. (Sellers like this process too: your offer will be enhanced by proof that you qualify for a loan -- which may give you an edge if there's another bidder on the property.)
Shop around and see who offers the best deal to "pre-qualify." It shouldn't cost you anything to get full disclosure of the terms. But the odds are against you getting approved with that bankruptcy filling. (We like a site called www.bankrate.com for comparison shopping in your area.)
Be careful about lenders who "specialize" in people with bad credit. There's almost always someone out there who will lend you money. But the terms may be stacked against you so badly that you'll find yourself back in bankruptcy court again. And this time around, thanks to a new, tougher law , it won't be as easy.
As for the plan to buy and rent, that's a whole different question. This can be a very nice way to make money. But you have to first get a solid feel for how much you'll be able to charge in rent for the type of property you're thinking of buying. So you first want to go house-hunting with an agent and look at rental listings. If you're not familiar with the rental market, spend plenty of time checking out other properties. This, after all, will be your competition. Don't even think of buying until you're confident you understand how much renters are paying.
Then it's time to start looking at properties for sale. When you do, you'll need to come up with a realistic, conservative (i.e. on the low side) estimate of what you think you could charge in rent for the property you're considering. (If you can't, go back and look at more rental properties.)
Once you've found a property and made your rent estimate, you then need to work out your monthly costs: mortgage, upkeep, taxes, insurance, etc. (Be prepared to budget plenty of your own time for managing the property, too.) If you can't cover these costs with your estimated rent, walk away. You want to make sure you have "positive cash flow" (i.e., rent minus expenses equals more than $0). If you calculate zero or below, you might still make money if the property appreciates in value, but with the recent run-up in prices, you certainly can't count on that happening.
You'll also want to talk to a tax advisor to find out what impact this rental income has on your return. If set up properly, rental property should have a positive impact. But you'll want to know all of the tax angles before you buy. You may have to pay a fee to a tax expert for this. But it could save you thousands of dollars in the long run. (Consider it a tuition payment in real estate school.)
Make sure to ask as many questions as you want at every stage. No question is too basic. And remember, no matter how congenial the mortgage broker and real estate agent are, they are not your friends. They want you to borrow and/or buy. To get a loan, you'll have to show enough income and assets to meet the lender's minimum requirements. But it's not their job to decide whether you can really afford it or whether the property will make money for you over the long term. So take everything these folks tell you with a grain of salt.
If you've gotten this far, take a deep breath and re-check everything again. Don't buy until you're satisfied you understand every detail. Because your instincts are right: whether or not the housing market really is in a "bubble stage," prices (especially in your area) have been rising much faster than usual. That means that most of the "easy money" has been made.
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