Step-by-Step Guide to Buying Your First Investment Property




Why Make a Real Estate Invest?

Because of its usefulness, generally steady value, and steady revenue stream, real estate is one of the safer investments you can make. Furthermore, real estate has five main benefits that are almost only found in it, which make it an excellent means of generating wealth.

 

USE OF LEVERAGE

 

One of the most effective strategies for accumulating wealth is leverage, which is the idea of utilizing other people’s funds—in this case, the funds of the bank. It’s the concept of receiving more for less money, such as when you purchase 100% of a cash-flowing property with 80% borrowed funds. You receive a higher return on your investment because of the mortgage’s high Loan-to-Value and low, fixed interest rate, particularly when your rent rises over time and the mortgage payment doesn’t change.

 

CASH OUTPUT

 

The difference between the overall rental income your investment property brings in and the costs associated with keeping it maintained is known as cash flow. The allure of cash flow is that it is actual money that the tenant pays you, the landlord, each and every month. That’s money you can use to make ends meet, and if you increase your cash flow basis sufficiently over time, it will eventually pay all of your own living costs.

 

PRIMITIVE PAYDOWN

 

The loan paydown or mortgage amortization over time represents the third significant benefit. The fact that a portion of your monthly mortgage payment goes toward principal paydown and equity accumulation is one of the unstated benefits of financing a cash-flowing property. Thus, $200 of your $1,000 monthly mortgage payment—which you make every month—goes toward equity and stays in your pocket.

 

Reciprocation

 

The appreciation of real estate through time, whether forced or natural, is the fourth benefit of owning property and a means of accumulating equity. Real estate generally appreciates over time, barring catastrophic calamities and economic downturns. In fact, throughout the past 50 years, the average cost of a home in America has climbed seven times. Making the required renovations that raise the property’s worth due to its greater appeal and livability is another way to force appreciation. This implies that the price at which you sell your property will probably exceed what you paid for it.

 

TAX ADVANTAGES

 

You can save a significant amount of money over time by taking advantage of the many tax incentives and deductions available to real estate investors. You can write off regular and required costs for upkeep and management of your rental property from your taxes. Stated differently, you can write off costs like as interest on your mortgage, property taxes, insurance fees, upkeep, repairs, and depreciation.

 

Note: The tax code allows you to account for the fact that everything in your rental property will eventually need to be replaced before you even spend the money; this is known as a non-cash expense. Depreciation is the reduction in value of your property over time due to wear and tear.

 

After learning about the many advantages of real estate ownership and becoming enthralled with the prospects for accumulating money that await real estate investors, there are a few things you should be asking yourself.

 

ARE YOU SOME KIND OF LANDLORD?

 

You should ask yourself this question and be honest with your response since it will be crucial to both your long-term success and, let’s face it, your sanity. If you’re not prepared or don’t have the right procedures in place, renting out property may be a very difficult job. There are different ways to be a landlord: you can be hands-on (you hire people to do repairs, prepare leases, collect rent, and respond to tenant requests and complaints) or hands-off (a management company oversees the daily operations of the property). Either management approach will require you to monitor the rental property for a minimum of part of the time since, even with a management business, you should still have control measures in place that let you know what’s happening at all times. In the end, your investment property is yours to own and manage.

 

DO YOU UNDERSTAND YOUR LEGAL DUTY?

 

In addition to some obligations, landlords are required to abide by particular rules pertaining to tenants. The relationship between a landlord and renter is governed by both federal and state laws and regulations; you should familiarize yourself with a few of them, such as those pertaining to keeping the environment safe and managing security deposits.

 

Note: To find out about any additional responsibilities that might apply in your area, be sure to investigate the landlord-tenant legislation in your particular state and municipality.

 

IF YOU WANT TO BUY FINANCE OR CASH?

 

Whoever can afford it can choose to purchase with cash, avoid dealing with a bank, avoid debt, avoid paying a mortgage in full, and become the only owner of the property. Purchasing cash has the benefit of removing the possibility of loan default, which could result in the bank seizing your investment and the property. You also witness a reduction in a significant expense and an improvement in your cash flow.

 

Purchasing cash has the drawback of requiring more funds up front, which could postpone your capacity to make your initial investment. You also forfeit the fixed low-rate mortgage payment and the advantages of leverage. Financing the property at a low interest rate, if the investment makes sense, will only increase your returns and enable you to potentially spread your funds over several properties. For example, you can use the same amount of money to purchase two or three properties with the assistance of the bank, rather than paying cash for only one.

 

Continue reading if you decide you’re ready for the challenge of landlording and would want to find out how to make your first investment.

 

ANALYZE YOUR MARKET

 

Choose the areas in which you wish to own rental properties and where you wish to invest your money. It can be in your city, in your close area, or even out of state. Being overly remote from your rental property and detesting the lengthy journey is the last thing you want. The ideal market is one that is no more than 1.5 hours away. Additionally, before making an investment in that market, you should be aware of three metrics:

 

The ideal vacancy rate is 5% or less; if it’s higher, it could indicate that it will take a long time to locate a renter for your rental property.

 

Days on market: In the neighborhood you select, you want to be sure that reasonably priced homes sell in less than four months. A market with a high DOM may indicate that not many buyers are interested in the item, which could make it difficult for you to find a buyer when the time comes to sell.

 

rising population and positive employment trends Whether the pool of prospective buyers and renters is expanding is one of the most crucial metrics in a real estate market. A growing population ensures a steady tax base to support the infrastructure and public services in the area, which are essential to preserving property value. Roadway projects and other public service systems will eventually run out of money due to a shrinking tax base. What guarantees enough tax revenue is the state of the local economy and whether or not it is a desirable place for businesses and employees to operate. These people are possible tenants for you.

 

OBTAIN A DEPOSIT PAYMENT

 

Find out what local rental houses are asking for, then figure out how much of that you’ll need for a down payment (20%). Furthermore, set aside an additional 4-5% of your savings for closing charges, which are transactional costs that will necessitate bringing additional cash to the closing table. Finally, banks prefer to see reserves equal to two to three months’ worth of mortgage payments.

 

APPLY TO BE PRE-APPROVED FOR FINANCE

 

You’ll immediately find out what rental homes sell for in that location and how much of a down payment you’ll need to put down once you’ve decided which market you want to invest in. Once you’ve crossed those two items off the list, you should focus on obtaining pre-approval so that you can apply for a loan (assuming you decide to finance rather than buy cash). Pay close attention to what your mortgage lender is saying throughout your chats because this will need specific documentation and is a prerequisite to receiving an actual mortgage approval.

 

Become an expert in property analysis

 

You are prepared to locate your first investment property if you have a down payment and a pre-approval. The next skill you need to develop is your ability to recognize a good offer. You need to know what makes a solid investment in order to recognize a good offer. The good news is that basic arithmetic is all that is needed to perform the calculations needed to assess and analyze a rental property.

 

Examine numerous deals.

 

You should anticipate that it may take up to three months to locate your first investment property because you won’t find the ideal rental home for a while. Even though you must act quickly and decisively when you see a good deal, you should refrain from making an offer before you have had a chance to view and evaluate at least ten to fifteen deals in your market. I would wait and see what is available until you find an incredible deal and get approval to pursue it from other knowledgeable investors.

 

SEARCH FOR ESTATES

 

You’ve now merged your purchasing power with your understanding of the rental market and properties, and you’re prepared to start looking. Investing in your first rental property may be an exciting and scary experience. Don’t be too hard on yourself if you start to question your judgment or your math skills. Let yourself experience the feelings, but don’t let fear or the disappointment of all the offers you were turned down for deter you. Yes, you will undoubtedly fall in love with a house, rush to make an offer, and then have to wait a few days to find out that the seller accepted another offer. When that occurs, maintain your wits about you and avoid becoming emotionally invested in any one property; after all, you are purchasing it to rent out, not to live in.

 

DISCOVER HOW TO IDENTIFY A GOOD DEAL

 

Gaining knowledge about deal analysis will enable you to calculate a rental property’s fair worth by taking into account its revenue and expenses. Additionally, the time you spend looking and witnessing numerous sales will enable you to distinguish between excellent and terrible deals. You should eventually be able to read and create an income statement that will provide you with the following details about any property:

 

Gross revenue

 

operational costs

 

Operating income net

 

Debt management

 

Money movement

 

Understanding them and their potential impact on your cash flow, or bottom line, is essential for successful real estate investing. You can submit an offer as soon as you’ve decided that a property is worth pursuing since it has excellent or very good foundations.

 

PRESENT AN OFFER

 

When buying your first investment property, making an offer is crucial because there’s no assurances that it will be accepted. Many factors in the market can work against you, such as a poor offer that lacks the necessary documents to give you confidence in your ability to close or is too low or includes too many contingencies. Make sure the offer price, down payment amount, list of contingencies, and preferred closing date are all stated in detail in a separate offer letter. Send your offer letter with your pre-approval and proof of money (a bank statement). If you choose to use a realtor, your real estate agent is capable of doing these things. If not, it is your responsibility to make sure your offer is compelling.

 

DUE COURTESY

 

You are prepared to begin the process of removing specific risks and begin due diligence after your offer has been accepted. Prior to closing or renting to a tenant, you should arrange an inspection so that a qualified inspector can advise you of any repairs that must be made right away. Ignoring repairs can lead to unforeseen costs and a delay in renting out the home. You can haggle with the seller to take the additional cost into account if repairs are indeed necessary. It is advisable to request documentation from the vendor in order to reconcile your projected earnings and outlays with the factual figures. If there are already renters on the property, you should also request to examine their leases. After going through this process, if you’re comfortable and haven’t found anything that throws off your analysis, you can decide to move forward with signing a contract and submitting an application for a mortgage.

 

ACQUIRE A MORTGAGE, BUT WATCH OUT FOR HIGH INTEREST RATES

 

Even if interest rates are at historically low levels right now, you need still make sure you get the best APR—the rate that accounts for all other charges related to your loan—and interest rate available. Speak with multiple banks and lenders to see which one offers the greatest loan program for you in order to make sure you get the best rate available. You are free to compare them to other lenders and banks since you are not obligated to choose the one that provided you with the pre-approval. These discussions are also quite instructive and helpful in understanding financing, which is a crucial aspect of real estate investing.

 

NEAR

 

You’re prepared to close on your first investment property after you submit an application for a mortgage and have it approved. You will have to sign and turn in a ton of paperwork when an appraiser visits the property to assess it. Following the completion of these tasks, you will be approved to close. A closing date will be set, and at the conclusion of the meeting, you will receive the keys and ownership to your first investment property.

 

MANAGE PROFITABLY, EFFICIENTLY, AND DECENTLY

 

You have to handle your first investment property well after you find it and close on it in order to realize the earnings, which is why you started this whole process in the first place. To effectively monitor your property, determine which management style best fits your objectives and way of life. Above all, never stop learning and investing!