How to Buy Your First Investment Property
06 15 2017
Purchasing real estate as investments can be an excellent addition to balance an investment strategy. However, after you’ve consulted with your trusted financial advisor and before you buy your first house, duplex, condo, or apartment building to rent out, it’s crucial you have a good idea of what you’re getting into.
6 Steps to Buying Your First Investment Property
On the path to buying your first investment property as a method of real estate investing, there are many steps and tricks to getting started on the right foot. If you’re learning how to invest in real estate and aren’t sure how to start, check out the tips below.
1. Be prepared for work.
Before you purchase the property, you should understand all the risks that go into buying and renting real estate – and evaluate whether you’re truly read for this level of commitment. For example, should there be some handy work required, you can either do it yourself or call someone to do it for you. Keep in mind that if you decide to do the latter, this will eat into your profits, as you’ll have to pay them for their work.
And that’s kind of the point. Renting your first investment property will take a lot of work, as you will be learning how to be a good landlord and deal with your tenants. Make sure you have the time and energy to dedicate yourself to the job.
2. Do your research.
Make sure this property is a good fit for you and be sure to ask the right questions. Is the property in a good neighborhood to buy in? What did the property sell for the last time around, and does it seem to be valued accurately? You should consider an area that has low property taxes and a growing job market. You also want the property to be located near plenty of amenities, such as parks, malls, restaurants and movie theaters, as these elements may benefit the value of the property down the line or the likelihood that you will find tenants.
Talk to your real estate agent about the property and the neighborhood and ask them any lingering questions you may have. They will be able to share the property history with you and tell you anything important you need to know about the area that you couldn’t find out on your own.
3. Set a budget.
Decide what type of property you would like to purchase, and save and budget accordingly. Spend some time looking at a variety of properties within your budget that are in different neighborhoods. Are you looking at a duplex, a warehouse, or a small apartment complex? The more properties you see, the better the idea you will have of what’s available in your price range.
4. Understand the loan terms.
To purchase real estate, you will start off the process by providing a down payment. As Zillow explains, “the minimum down payment required for a conventional loan is 3%. But still, a 20% down payment is considered ideal when purchasing a home.” Depending on your plans for the property (short-term vs. long-term ownership), you can benefit by putting down as much money as possible, as these types of properties have more stringent approval requirements.
As appropriate for your situation, discuss first-time home buyer programs or FHA loans with your financial advisor, which typically require 3-5% down and may have specific credit score minimum requirements. If your credit score is on the higher side, even better, because it can help you secure a lower down payment. FHA loans have their own benefits: You typically have a lower mortgage rate, the down payment is less than a conventional loan, and the seller could pay up to 6% of the loan amount to cover the buyer’s closing costs.
5. Set realistic estimates for the investment.
It’s also helpful to consider what you’ll make on this investment. As an individual investor, it’s best to set a goal of 10%. You also want to estimate what your closing costs and operating expenses will be, and factor those into the equation.
Your operating expenses (between 35% and 80% of your gross operating income) can be a range of things including marketing and advertising, taxes and insurance, utilities, trash collection, property management, maintenance and repairs, landscaping, accounting and legal, and snow removal or pest control. It’s helpful to consider what you charge for rent and how much your expenses will be so you’ll understand how much money you may make at the end of each month. For example, if you charge $1,500 for rent and your expenses come in at $600 per month, you’ll make around $900 that month.
6. Compare and consider property types.
Once you’ve completed the steps above, it’s finally time to start looking. However, there are a few things to consider when you start investing in property. You may also want to consider the type of property you’re buying. Many wouldn’t recommend buying a fixer-upper – as tempting as it may be to flip it, it’s going to require a lot more money and work than you anticipated.
For example, you will need to buy the tools and materials necessary to refurbish the house. Unless you know a contractor, who does great work for a cheap price, you’ll likely pay too much money to renovate and miss out on the profit. Instead, it may be best to buy an undervalued property that needs only a few minor repairs.
Speak to Your Financial Advisor & Seek Advice
There is a lot to consider when you are buying your first investment property, and you should do your best to not set high expectations for your first go-around. As with many investments, real estate isn’t going to produce high returns overnight, and are risks associated with every property, regardless how attractive they appear.
You must take your time and do your research to make sure you are purchasing the right property for you and your investment needs. Talk with a financial advisor and your real estate agent to get their advice and answer any questions you may have. This is your first investment property – you want to make sure you do it right.
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