Buying your first investment property is exciting and scary all at the same time. You have many options, and many factors go into the decision. While it may seem overwhelming at first, you can easily buy your first investment property with the proper steps.
The key is to know why you’re investing in real estate, what goals you have, and what obstacles may stand in your way.
Reasons To Invest In Real Estate
You may wonder if you should consider investing in real estate. It seems risky and like an enormous responsibility, but many benefits outweigh the risks, including:
Real Estate Appreciates
When you invest in stocks or bonds, there’s no guarantee you’ll walk away with a profit. If the market tanks and you lose everything, it could take much longer than your timeline to make it back.
Real estate appreciates naturally, and you can also force it. Home renovations and remodeling can improve a property’s value, giving you an even greater return on your investment.
You Can Leverage Your Investment
If you have average to good credit, you can borrow money to invest in a home. While you’ll need a down payment, usually 20% – 30% of the sales price, you can borrow the rest. This isn’t true of many other investments, especially stocks and bonds – you can only invest in the amount of money you have.
You Can Earn Cash Flow
If you invest in a rental property, you can earn cash flow in addition to any appreciation. You earn cash flow from the rent charged on the property and after you pay the expenses including the mortgage, taxes, insurance, and any maintenance costs.
You Can Diversify Your Portfolio
Putting all your eggs in one basket is risky. If you put everything in the stock market and the stock market crashes, what do you do? You’re left with nothing. If you diversify your risk, investing in stocks, bonds, and real estate, you don’t have all your money at risk at once. If one area doesn’t do well, another might offset the loss.
10 Steps To Buy Your First Investment Property
So how do you invest in your first investment property? Here are the simple steps.
1. Determine Why You Want to Invest In Real Estate
Think about why you’re investing in real estate. Are you trying to earn cash flow or a quick profit? What is your end goal?
Think about what you’re saving for, such as:
Paying for your child’s college education
Leaving behind a legacy
Other financial goals
Your goal’s timeline will determine if investing in real estate is right for you, and if so, what type of investment. The most common ways to invest are buying and holding properties (rental properties), fixing fix and flip properties.
Buy and hold properties are great for those with long-term financial goals or those looking to earn a monthly cash flow. You’ll earn money each month you have a tenant, and you can regularly look for new tenants and even increase the rent you charge as values appreciate.
In your decision, assess your lifestyle. What can you handle? Do you have time to manage a rental property? This includes 3 AM phone calls for maintenance issues and other emergencies. If not, do you have room in your budget to pay for property management?
If you’re more of a ‘fixer,’ do you have the time, energy, and money to rehab homes and sell them for a profit? Most fix and flip transactions occur within six months, so you have to be able to move fast.
2. Assess Your Personal Finance Situation
Before you invest in real estate, make sure you can afford it. If you’re going to buy a rental home, you need enough money to cover the expenses, including the mortgage payment (if applicable), maintenance and repairs, renovations, taxes, and insurance.
It’s important not to rely on your rental income as no home has 100% occupancy. You can’t predict if/when a tenant may vacate the property, leaving you with the expenses and no income. Make sure you have all your financial obligations covered and have enough ‘free money’ to cover your rental costs should you need to.
If you’re buying a fix and flip, you need more considerable sums of money upfront. First, you need money to buy the home. If it’s a fixer-upper, chances are it won’t pass the lender’s appraisal, which means you’ll need a much larger down payment or possibly need to buy the home in cash. You’ll also need funds to fix the property up, which depending on the type and amount of repairs required, could get pricey.
If you’re unsure what a home would cost or what type of income it would bring in, Roofstock Marketplace is a great place to look at houses. It’s a free online marketplace that anyone can browse. If you find a property you want to buy, it only costs you 0.5% of the sales price in commission to buy it.
3. Get Pre-Qualified
If you’re just in the planning stages of buying a rental property, get prequalified for a mortgage. While it’s not an official approval, it will tell you where you stand for financing.
A pre-qualification will tell you what you need to do to get the financing you need. For example, are your debts too high? If you have a high debt-to-income ratio, you can pay the debts down or off to get approved.
If you don’t have enough money for a down payment or don’t have enough money saved for reserves, you can save more money before applying for a mortgage. The pre-qualification can tell you where you stand and how soon you’ll be ready to buy an investment property.
A pre-qualification is usually good for 90 days, but once you’re ready to buy a house, we suggest getting a pre-approval as that’s a more solid lending decision. As long as you can satisfy the conditions on it, you’ll be on your way to a mortgage for an investment property.
4. Assess Your Savings (Reserves)
Even if you have a pre-qualification, you may need to have more money saved for reserves. This is money you have set aside to cover unexpected expenses or to cover the bills should you lose your tenants.
It’s a good idea to have 12 months of reserves on hand. If you aren’t sure how much that is, find out the average rent in the area you're thinking of investing in. Roofstock Marketplace is an excellent resource for looking at average rents and even the costs you could expect.
5. Choose Your Investment Strategy
Your investment strategy is crucial to your investment purchase. Are you buying for the long-term and renting the property to tenants, or is this a short-term investment that you want to liquidate quickly?
If you buy and hold, think about how long you’ll own the property. Is it something you want to keep long-term, or will you do this for only a few years? Your strategy will determine how you invest. For example, if you are only investing for the short-term, finding properties on Roofstock Marketplace that already have tenants is the easiest way to earn cash flow right away, wasting no time in finding a tenant.
If you keep the property long-term, you can always find new tenants when your current tenants’ lease expires. You can also hire a property management company to do this for you.
6. Create A Support Team
Investing in real estate takes a village. You’ll need eyes and ears all over the place to help you create a successful real estate portfolio.
Your support team may consist of:
A home contractor
A loan officer/mortgage company
A real estate agent or a platform like Roofstock Marketplace
Your support team will help you cover all angles of investing in a property. You’ll have someone to look over the legality of your documents, a professional to determine the property’s value, someone to evaluate the home’s soundness, and someone to fix the property. You’ll also have someone to provide financing to leverage your investment and a person or platform helping you find the right property.
7. Look For Suitable Homes
Once you do all the ‘leg work,’ it’s time to find a home! Again, using a platform made for investors is a great resource. You can get the information you need without taking up too much time or effort. You can browse the Roofstock platform day or night in your free time, allowing you to see which homes are out there.
Keep in mind, you don’t have to restrict yourself to just your geographic area. If you work with a reputable platform, you can find a property outside your state. If you hire a property management company to watch over it for you, it’s like a passive investment – you collect the cash flow, and the rest is handled for you.
8. Do Your Due Diligence
Once you find a property, it’s essential to do your due diligence. This means several things, including:
Determine the property’s fair market value to determine a reasonable offer
Have the home inspected
Talk with a home contractor to determine the cost to fix the home up if it’s a fixer-upper
Crunch the property’s numbers including the cash flow, cash on cash return, return on investment, and net operating income.
If you don’t want to handle the details or crunch the numbers, Roofstock Marketplace does all of this and more for you, helping you make a solid investment decision.
9. Make An Offer
If you decide the property is right for you to invest in, make an offer. No matter how you buy the home, this process is the same. You submit an offer that includes both a financial offer and all conditions. For example, if you want an appraisal contingency so you can back out of the sale if the home doesn’t appraise, that’s part of the offer.
The seller may make a counteroffer. They may also accept or decline the offer as-is. Each seller can handle it how they like. Once the seller accepts your bid, you enter a sales contract and start the process of buying a house.
Typically, it takes 30 – 45 days from the day you sign the contract to close the deal, but it depends on how you buy the home and the circumstances involved with the seller.
10. Buy Your Investment Home
Once you’ve done all the legwork, it’s time to buy your home! If you purchased it on Roofstock Marketplace, Roofstock makes it easy to get to the closing. If you bought it outside of the marketplace, you’d work with the title company handling the sale to get to the closing table.
If you bought a turnkey property, you’d become a landlord when you sign the sales contract. If the property doesn’t have tenants or it’s a fixer-upper, it’s up to you to find tenants or start working on the property so you can sell it.
The Bottom Line
Buying your first investment property is a solid personal finance decision. You’ll earn appreciation and possibly cash flow. More importantly, you’ll diversify your risk of a total loss by not putting all your eggs in one basket.
It’s not as complicated or overwhelming as it seems, and buying an investment property can be the start of even larger investments. As the home appreciates, you can increase your portfolio and have even more money to save for your long-term needs.
Image by Free-Photos from Pixabay
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