Considerations When Investing in Real Estate for the First Time with Michael Sico

Three Overarching Principles for Beginners to Keep in Mind When Initially Purchasing Property

In many ways, owning property is the most tangible expression of the American dream. Laying claim to a piece of land and a dwelling of one’s very own is the ultimate realization of self-sufficiency, and the feeling it inspires in a person is close to indescribable—something like a pronounced and refreshing sense of freedom tempered by a healthy dose of newfound responsibility. Not only that, it gives a person a stake in their community and at least slightly increases their standing as a citizen. So, it is not a mystery why, having taken care of acquiring their own living space, many people wish to continue investing in real estate. Almost universally, it appreciates in value and adds to personal wealth. However, the real estate market can be nebulous and unforgiving. For the unfamiliar, it can be financially risky and potentially ruinous. How should someone go about making such a major purchase as their first piece of property? Whether buying a first home for oneself or entering into the larger real estate market the for the first time, the principles at play—if not the specific strategies—are essentially the same.

Michael Sico - a partner and the Chief Financial Officer at Michael John’s Developers L.L.C provides a list of three overarching principles for beginners to consider when initially purchasing property.

Do Not Allow Emotions to Cloud Judgment

"For the first-time homebuyer, it is easy to get swept up in the whirlwind of emotion connected to such a life-changing event" states Sico. "Nearly everyone has a vivid mental picture of what their first home should look like and where it ought to be located." However, sticking to these ideals can cause a homebuyer to overlook opportunities and miss out on other plausible, well-priced listings. By the same token, if such a dream property is found, it can lead to the homebuyer paying more than is warranted to secure it.

Similarly, for the first-time investor, the thrill of making a grand debut on the real estate market can be a little intoxicating. When a person has finally set aside enough money to make their first major property investment, there can be a tendency to be impulsive. So-called ‘hot tips’ from acquaintances or friends can suddenly take on an allure that is unjustified. Indeed, simply driving past a nice-looking building with a for sale sign out front can conjure up notions of a quick purchase. But these are not the actions of a savvy investor. It is important to dispassionately and methodically evaluate each property on its merits instead of giving in to whims and rumors of once-in-a-lifetime deals. By removing all emotion from the assessment process of prospect properties, a novice investor can save themselves both money and some degree of heartache.

Secure a Down Payment

When buying a home for the first time, a down payment of twenty percent is preferred by most mortgage lenders. Obviously, this is not feasible for every first-time homebuyer, but there are other options available. For example, Federal Housing Administration loans, which are issued by private entities but underwritten by the U.S. government, require only a three and half percent down payment. However, it should be noted that the more money that can be gathered up for a down payment, the lower the interest payments on a mortgage will be, and the cheaper a property will end up being in the end. An appropriate down payment for a first-time homebuyer should be as much as a person can afford to pay above the bare minimum without it having a negative effect on their other finances.

Although the overarching principle of securing an appropriate down payment remains constant, there is something of a difference in the amount of money the first-time investor ought to have on hand before making a purchase when compared with a first-time homebuyer. Investment properties generally require a larger down payment than owner-occupied properties; usually twenty percent of the total price. This is partially due to the fact that mortgage insurance is not applicable to investment properties, and partially due to the fact that investment properties have stricter approval requirements concerning finances. So, in this case, an appropriate down payment is twenty percent of the property’s total sale price or above and investors have little choice in the matter.

Retain the Services of a Real Estate Lawyer

Lastly,when engaging in a property transaction of any kind, it is of paramount importance to have the terms of sale looked over by a legal professional specializing in real estate. Many inexperienced investors might dismiss this notion as frivolous or unnecessary, and while it is true that it this not required by law, it is an intelligent thing to do. A real estate lawyer acts as an advocate for the interests of their client, and is trained to understand contract law in a way an ordinary person does not. They know how to navigate the dense legalese inherent to binding documents, and will warn an investor if there are odd provisos, hidden clauses, or unfavorable terms contained in any given agreement. The instances of a real estate lawyer saving their client a huge sum of money by simply giving a contract a once-over before it is signed and notarized are literally uncountable. Add to that the fact that most do not charge an upfront consultation fee and opt instead to take a commission upon the completion of a sale, and retaining the services of a licensed real estate lawyer is more than worth the expense.

According to Michael Sico, "The decision to buy property is no small commitment. The difference between making a good investment and making a bad investment can be the difference between prosperity and bankruptcy. By adhering to the three fundamental principles of not allowing emotions to cloud judgment, securing an appropriate down payment, and retaining the services of a real estate lawyer, anyone, be they a first-time homebuyer or a first-time property investor, can make a wisely-grounded purchase."