|
|
When people learn I’m a real estate investor, how to buy their first investment property is one of the first questions they often ask. When I open up my Instagram stories to questions, I receive dozens of variations of this question. I think this is because getting started is the hardest part of the investment process. After that, momentum takes over.
I’ll admit, it’s enticing to think about getting into the real estate game, buying one investment property after another, and watching your real estate empire grow. But, we all have to start somewhere, right?
Cash Makes It Easier
First lessons first, it’s easiest to buy your first investment property if you have a hefty amount of capital.
If you don’t have access to cash, then you’re either going to have to find a mentor, get educated about creative financing options, or use a low down payment loan to get your first property. Examples of low down payment loans include, but are not limited to, VA loans, FHA loan, HomeReady™ mortgage, and Conventional 97 loans, and more.
Low down payment mortgages definitely exist, but they also have their disadvantages, such as having to carry a larger overall mortgage, having to make larger payments each month to pay it off, and being at greater risk of going “underwater” on your loan if property dips in value due to uncontrollable market conditions. Underwater simply means that you owe more on your mortgage than the property itself is currently worth.
Beyond that, there are several factors, such as your ability to tolerate risk, that you must consider when buying property, especially rental investment property. With great risk, however, comes great returns.
So let’s get you started with your first real estate investment property.
Learn As Much As You Can About Real Estate
In many ways, this is the hardest part of the process, because it takes patience and a bit of time. Once you understand the ins and outs of the industry, making informed decisions becomes easier, and so does growing your empire.
Read real estate books from the moguls, read property investment websites, and talk to people that are already in the industry.
You won’t understand all of what you read when you first get started. That is ok. Let repetition and repeat exposure be your teacher.
You didn’t understand English (or whatever native language you speak) when you first heard it either. But, you sure are good at speaking it now.
Three books that I’d recommend that you go grab are:
- The Book on Rental Property Investing: How to Create Wealth and Passive Income Through Smart Buy & Hold Real Estate Investing
- The ABCs of Real Estate Investing: The Secrets of Finding Hidden Profits Most Investors
- The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom
Find a Real Estate Mentor (If You Can)
If you can, find a mentor who loves real estate and is actively buying it. Many mentors will be more than willing to impart their knowledge on you if you ask nicely, and importantly, offer value in exchange.
For example, you could offer to meet or call contractors for them when repairs are needed, drive them to properties that need to be viewed, or do administrative tasks. If you have other skills, such as marketing or design skills, that might be relevant to offer too.
Ask all the questions you have, regardless of how silly they sound, and gather information from people with first-hand experience in real estate. Learning what worked for successful people will help you avoid common mistakes that could set you way back.
Commit Yourself Relentlessly
This is an essential part of the process because it’s easy to quit even before you begin, especially once you hit a roadblock.
Purchasing your first investment property will take some work, so you’ll need to discover your motivation and be committed to your goal.
Write it down. Yes, with ink on paper. Tell your friends and family. Commit.
It’ll help you to commit if you understand how powerful it is to create multiple flows of income in your life (the average millionaire has 7+) and get knowledgeable about the amazing tax benefits associated with real estate.
To give you a quick tax overview, with investment properties you’ll benefit from deductions related to mortgage interest payments, depreciation, and property repair expenses. You can also sell your properties tax free using a IRS law called the 1031 exchange, as long as you’re rolling your money into a like-kind investment of equal or greater value.
Discover What Makes a Good First Investment Property
An investment property is one that should make you money, so the most fundamental question you should ask about a property is whether it has the potential to do so.
Calculate the return on investment (ROI) of the property by determining its expected annual net returns.
In short, this is the equation to know:
Rental Income – Mortgage – Maintenance = Net Cash Flow Per Month
Your mortgage will include your principal payments, interest payments, homeowners insurance and taxes, so using it within this equation keeps things simple.
If you’re using a property management company, include that expense within the maintenance figure, because they will help you to operate the property and charge you a small amount to do so.
If you have a residential property, you can expect to pay a property manager 8-10% of the rent that you collect. Typically, they will also get to keep the first month’s rent if they find you a new tenant.
If you own commercial property, such as apartments, mobile home parks, land, industrial or retail space, you may only pay a property manager in the 4-10% range.
After you do this math, you’ll have a clear understanding of whether making a purchase is a sound investment decision.
Know What to Look For In an Investment Property
Aside from the ROI, other criteria must be considered when buying rental investment property.
For example, is the property a fixer-upper? If so, you’ll need to expect a month or more of vacancy after taking control to get it fixed up.
Is it currently rented? If not, you’ll going to need to get a rental listing written up, as well as meet and screen potential tenants.
Other questions to consider are:
- Do you have time to dedicate to the maintenance of the property?
- Can you handle a renovation process if necessary?
- What kind of tenants would you like to deal with? Young couples, students, high-income earners, or subsidized income earners?
Different properties will attract different tenants and this is a crucial aspect of buying rental property.
You’ll also want to learn about any demographic shifts in that location that could impact your investment in a positive or negative way. Most importantly, will the market support your rent?
The rule of 1% states that property should be rented at least 1% of its value every month.
Start a Property Search
Once you lock in your finances, it’s time to start looking for your first investment property. You can easily achieve this using online websites, such as Zillow, Redfin and other property finders.
You’ll want to know how to use a mortgage calculator, which is a tool that lets you plug in a purchase price and the loan terms that you plan to use. It will then automatically calculate the mortgage payment you should expect to pay each month.
Once you find something you like, you must analyze it thoroughly because not all real estate properties can make a profit. When it comes to investment properties, expect to go see 10-15 properties (and often many more) for every one on which you will make an offer.
Purchase and Start Your Journey
As soon as you make the purchase, start marketing, even if you have some renovations to do. By the time your property is ready for occupancy, you’ll have tenants ready to move in.
The best spots to advertise your property are on Craigslist, your city’s Facebook Marketplace, or Zillow.
On Zillow, it’s free to list properties for rent unless you’re running paid ads with them. A sign in the yard also works surprisingly well. Even in a neighborhood where I own several properties on a cul-de-sac (no through traffic), I’ve repeatedly found tenants using a yard sign we bought from Home Depot.
The journey after buying property also will have some ups and downs. With difficult tenants, repairs, and all other issues landlords face, you may want to hire a property management company to handle your tenants and property repairs for you.
For many people, this is a wise decision. However, it does have tax implications. In some cases, hiring a property management company can change you from an active real estate investor to a passive one. Perhaps more importantly, though, no one will ever put as much attention into optimizing your investment property as you will.
In my experience, if you are scaling your real estate portfolio, property management will be crucial because it will allow you to duplicate yourself. However, if you’re buying your first property, your investment will probably benefit from your direct involvement and oversight.
Consider Your Financing Options
If the numbers work out, there are many ways to finance a property. You can save up, although this will take a long time or you can put a fraction of the purchase price down and get a mortgage. If you were taught by your parents and peers to avoid debt, drop all of those notions immediately!
Income-producing debt is debt that is paid by someone else (your tenants) and on which you make a profit beyond the costs of repayment to the lender.
It is definitely good debt.
Private lenders are an alternative to traditional lenders (banks), but generally speaking, they will charge you a substantially higher interest rate to borrow money.
Sometimes, you can also get the seller to give you financing, called seller financing or owner financing. In this case, you’ll buy the property from the seller in installments over time, instead of giving them an upfront payment, which is what you do with a mortgage. If you ever default on these payments, then they can take the property back from you.
Seller financing actually has many advantages for sellers, most notably, their tax burden gets spread out over time as they receive payments from you. Meaning, if you’re dealing with an experienced seller, they might be more open to this financing option than you may think.
The trick here is to have financing before looking for the perfect property. Getting approved for a mortgage, for instance, may take a while. The moment you find a property, you need to act or another buyer will beat you to it. This has happened to me too many times, so now I get my financing paperwork completed before I start my search.
Additionally, you’ll want to know how much lending you qualify for, so that you can target investments in the right price range.
Go Get Your 1st Investment Property!
I believe that acquiring real estate investment properties will change your life and move you toward financial freedom.
The younger you can buy them, the better, because even if you do nothing right, your mortgage will be paid in full within 30 years. At that time, you’ll own the property outright and will be positioned to collect nearly all of the monthly rent as pure profit. That’s pretty incredible.
As long as you learn as you go and take consistent action toward your goals, you’ll own a portfolio of investment properties quicker than you think.
Do you have questions about how to buy your first investment property? Ask me in the comments below, because I am happy to help.
Tell Us What You Think!