GUIDE TO REAL ESTATE INVESTING IN THE USA IN CALIFORNIA

 GUIDE TO REAL ESTATE INVESTING IN THE USA IN CALIFORNIA

Investing in real estate in California, USA: is it a dream come true?

While searching for a property is an exciting adventure, it's far from easy. Everything from the local economy to your own financial situation, including the California real estate market, directly or indirectly impacts the type of property you can purchase and its price.

A wise real estate investor is worth two. This is especially true given that the California real estate market is currently a seller's market. Simply put, this means that demand exceeds supply, and homes and other types of real estate remain available for sale for a very short time.

Additionally, property values in California are on the rise. In 2022, home price predictions for California are around 8.4%. Borrowing rates, meanwhile, are relatively low, averaging 2.34% for a 15-year loan and 2.88% for a 30-year mortgage.

Investing in the US takes you to the western United States, to a state where you can find the property that suits you and get a good deal. Follow the guide!

Assess your financial situation

If you're considering investing in real estate in California and taking out a loan, it's imperative that you understand how your personal financial situation impacts your purchasing options. Some of the points lending institutions consider important include:

Credit score: On average, a minimum score of 620 is required to qualify for a conventional loan. If your credit score is below this number, it's imperative to improve it.

Debt-to-income (DTI) ratio: In most cases, borrowers must spend less than 36% of their income on debt. This includes the future monthly mortgage payment.

The deposit: for a conventional loan, a deposit of at least 20% is required

Transaction costs: When considering a real estate investment in California, you'll need to pay an average of 2 to 5 percent of the property's price in closing costs (or transaction fees). Considering the average home value in California, which is around $600,000, this represents a sum ranging from approximately $12,000 to $30,000. These costs generally have to be paid out of the borrower's pocket, so it's important to have sufficient cash to cover them.

Maintenance and repair costs: In California, maintenance and repair costs average $2,802 per year. This amount can vary considerably depending on the property. The general rule of thumb is to save 1% of your home's value each year for repairs and maintenance.

Calculating Loan Repayments

To get your finances in order, you need to determine how much you can repay each month on your mortgage. Generally speaking, lenders follow the 28/36 rule when deciding whether to approve an application. This rule is simple: total housing costs, including mortgage payments, should not exceed 28% of your monthly income. Total monthly debt payments, on the other hand, should not exceed 36% of your monthly income. This figure is called the debt-to-income ratio (DTI ) .

The lender's goal is to ensure that you can afford your monthly repayments. The higher your DTI, the less likely you are to qualify for a mortgage. However, most lenders are lenient if a borrower's credit score is high. For example, some lenders approve mortgage applications for borrowers with a debt-to-income ratio of around 43%; however, it's preferable for this ratio to be below 36%.

Want to calculate your DTI? It's easy! Add up all your recurring monthly debt payments, add your estimated mortgage payment, and divide the result by your gross monthly income. When calculating your monthly income, remember to include all amounts, including credit card payments, any student loans, car loans (if you have one), child support, personal loans, and so on.

Keep in mind that DTI affects the type of home loan you're eligible for. In most cases, a conventional loan requires a DTI after repayment of less than 36%. This rule isn't set in stone, and if your ratio is above this benchmark, further consideration will be given during the underwriting process.

Don't forget other expenses!

For the lender, the down payment helps minimize risk. By requiring borrowers to make a down payment, they also assume liability. For a conventional loan, the down payment is typically 20%. Some government-backed loans (including VA and FHA) often require a lower down payment, with other means used to offset the potential risk.

Calculating transaction fees (or closing costs)

When a real estate transaction comes to a close, it involves a number of services, including title searches, document recording, and more. These services are paid for, and a portion of the transaction costs are attributable to the seller. Typically, the buyer pays the majority of these expenses out of pocket. For a buyer, these costs can be as much as 5% of the loan amount. Examples include appraisal fees, inspections and surveys, mortgage application fees, property taxes, insurance, and more.

Choose the ideal neighborhood for your real estate investment in the USA in California

The neighborhood in which your future property is located is just as important as its layout and features. You'll need to consider the average home value in the area to determine if you can afford to live there. Historical trends will also tell you if your purchase is likely to be profitable over time.

Consider the local lifestyle. The neighborhood you live in can have a significant impact on many aspects of daily life, from your commute to school to where you can go out and shop around your home.

Get support from a competent real estate professional

When it comes to your real estate investment project in the USA and California, a real estate professional will be your key ally. They will guide you toward the properties to purchase and recommend other services and people by leveraging their network: lawyers, finance companies, insurance companies, etc.

Get pre-approved for a mortgage

It's important to note that due to the nature of the California real estate market, most sellers refuse to show their homes without first providing proof of purchase. This usually comes in the form of a mortgage pre-approval letter. Why would they waste their time with unscrupulous potential buyers?

Getting a pre-approved mortgage gives you and the seller the confidence that if your offer is accepted, you will be able to secure financing and close the deal.

When it comes to finding a lender, don't hesitate to shop around. The underwriting process can be time-consuming. If the lender takes too long to provide you with the required documents, this could lead to the failure of the transaction and therefore of your real estate investment project in the USA in California. Don't let a bad lender derail your purchase!

Find your dream home and make your real estate investment project in the USA in California a reality.

You'll quickly realize that no property is perfect. As you visit, you'll need to decide which properties deserve your attention and which don't meet your expectations.

You'll need to understand the current housing inventory: Depending on the time of year you're considering buying, you'll have more or less choice. If there are fewer properties on the market, you may need to adjust your expectations. Don't hesitate to make a priority list: What do you need? What are the non-negotiables? Rank each item according to its importance to you. This process will help you distinguish between what's nice to have and what's a must-have. If possible, share this information with your real estate agent. They will let you know if your expectations are realistic and direct you to the price range and neighborhood in which to conduct your search.

How long does it take to make an offer?

In California, homes currently stay on the real estate market for an average of 40 days. However, seasonal changes cause this figure to fluctuate: some months, homes sell very quickly, while others take longer to complete. Depending on the time of year you're looking to buy a home, as part of your real estate investment project in the USA, California, it's a good idea to make an offer earlier than expected, especially if homes stay on the market for a shorter time than the current average.

How do I make an offer so that it is accepted by the seller?

Price isn't the only factor that can influence a seller's acceptance of an offer. Therefore, it's possible to consider certain compromises, particularly depending on the state of the real estate market at that time, to streamline the transaction for both parties.

To reach a win-win agreement with the seller, it is possible, for example, to use:

Seller concessions: As the buyer, you will be responsible for financing most of the transaction costs. To save on the amount spent, you can ask the seller to make a concession. Instead of lowering your offer price, the seller agrees to pay a portion of the transaction costs, and the expenses can be rolled into the mortgage.

Repair loans: If the house needs repairs, applying for a loan is preferable to asking the seller to pay for the repairs. This way, you can oversee the work yourself and ensure it meets your expectations.

Waiving the inspection: Most real estate purchase contracts include inspection contingencies that allow you to modify an offer or withdraw entirely if the inspection reveals major problems. If, as the buyer, you are confident in the condition of the home (this may be the case, for example, if the seller can provide you with a recent inspection report), you can jointly decide to waive the inspection contingency, thus giving the seller a greater sense of confidence.

A letter to the seller: Many sellers have a strong emotional attachment to their home. They've lived there for several years and want to ensure that the next owner will take care of it. Writing a letter to the seller reassures them of this and strikes a chord that they might respond to.

Conduct of real estate inspections and appraisals

The seller has accepted your offer? That's great! Now comes a series of steps to ensure the property you're buying is exactly what you signed up for. After the inspection and appraisal stages, you'll have the opportunity to return to negotiations if anything unexpected arises.

It's important to understand that an inspection is conducted by a licensed professional whose mission is to inspect the property for any unseen, unexpected, or potential problems. An appraisal, on the other hand, is conducted by an appraiser hired by the financial lender. Their responsibility is to examine the property and determine its value.

There are inspections specific to the state of California. In addition to the general inspection, California recommends that buyers have inspections and tests performed before closing on a home purchase, including:

Radon testing: While not required by law, California strongly recommends that properties be tested for radon before any real estate transaction is finalized. This is especially important in areas across California where radon levels tend to be higher (e.g., Santa Barbara and Ventura).

Termite inspection, required for certain types of home loans and depending on the region in which you are purchasing your home in California.

Final visit and finalization of the real estate transaction

When it's time to close your real estate transaction, you can conduct a final inspection of the property to ensure it's still in the condition stated in the contract. While your eagerness is understandable, it's important to stay focused so you don't miss anything. So, during the inspection, be sure to check the following:

Ceilings, walls and floors to detect cracks, peeling or flaking paint...

Electrical switches and sockets

Water pipes

The operation of keys and access systems, including on garage doors

How the heating and air conditioning system works

The absence of personal effects belonging to the previous owner

The general cleanliness of the premises

On the day of the closing of the real estate sale, you will need to produce several documents. This is when your lawyer and real estate professional will be invaluable.

To successfully invest in real estate in the US and California, seek the support of a qualified professional. Investir US offers a free initial consultation with a French-speaking real estate expert. Click the button below to schedule an appointment.