Your First Investment Property - The Steps to Take
Investing in real estate is a great way to build wealth, create a passive income stream, and provide financial security for yourself and your family. But buying your first investment property can be intimidating and overwhelming if you’re unfamiliar with the process. This article will walk you through the purchase of your first investment property.
Step One: Set Your Investment Goals
The first step is determining what kind of investment property is right for you. You may set your heart on a single-family home, but other options exist. Depending on your budget, lifestyle, and plans for the property, here are some options to consider:
- Single-family homes
- Multi-family units
- Condos and townhouses
- Vacation rental homes
- Commercial buildings
When deciding which type of property is ideal for you, consider your risk tolerance level and the amount of money you can put down as a down payment. Also, consider the amount of work required for maintenance and repairs. If you’re new to investing, you may want to start with something less high-maintenance such as a condo or townhouse.
Step Two: Research the Market
Once you know what kind of property you’re interested in, it’s time to start researching potential properties. Sites such as Zillow and Trulia are great starting points. Here are some important things to look for when reviewing potential properties:
- The property’s location – look for areas with potential growth and appreciation.
- The property's condition – look for signs of wear and tear that will require costly repairs or renovations.
- The rental rate – check rental rates in comparable properties in the area to determine if the asking price is reasonable.
- The rental income – determine whether the rental income from the unit will cover your mortgage payments and other associated costs. This is very important for long-term success as an investor.
- The neighborhood – research crime rates and other factors in the neighborhood that could impact your investment decision
Step Three: Analyze Potential Properties
Once you have a good handle on the local real estate market, you can analyze potential properties. Investing in real estate is about finding the right deal, so look for properties with good potential for appreciation or cash flow. You’ll also want to look at things like operating expenses and potential repairs or renovations that will be needed.
Finding a Property That Fits Your Budget
When investing in real estate, your budget plays a major role in determining what properties are within reach. It also determines financing options, such as getting a mortgage or dipping into personal funds or other investments. Here are some tips for finding a property that fits your budget:
- Calculate all associated costs – When calculating the total cost of purchasing an investment property, factor in all associated costs, including down payment, closing costs, taxes, insurance, and any potential renovations needed before generating rental income.
- Get pre-approved – Getting pre-approved for a loan can help narrow your search and give you an idea of what properties are within reach. It also provides negotiating power when working with sellers.
- Work with a real estate agent – Working with an experienced agent specializing in investment properties can save time by helping you find properties that fit your budget and provide valuable insight.
Step Four: Make An Offer and Complete Due Diligence
Once you’ve found a property that meets your criteria, you must make an offer. Ensure that you include contingencies such as home inspection and other due diligence so that you have an out if something comes up during the inspection process. Also, ensure you get a clear picture of all closing costs and associated fees, so there are no surprises at the end of the process.
Step Five: Secure Financing
Next, you’ll need to secure financing for your purchase. Contact local lenders and shop for a loan that meets your needs and budget. Ensure that all associated costs, such as closing costs, points, origination fees, pre-payment penalties, etc., are included in your calculations to know exactly how much it will cost to take out a loan on the property.
Step Six: Close On The Property
Once you’ve found a property that fits your budget, closing the deal is time. Here are some things to keep in mind during the closing process:
- Understand all documents – Make sure you receive and understand all documents related to the purchase, particularly the contract agreement and loan documents, so there are no surprises down the line.
- Work with inspectors – Have a professional inspector review the property thoroughly before making an offer. This will help ensure no hidden surprises once the sale is complete.
- Get insurance – Ensure adequate insurance coverage for your investment property before closing on the deal to protect yourself from unexpected damages or liabilities.
Once everything is finalized, congratulations! You are now officially a real estate investor!
Managing Your Investment Property
Once you’ve closed on your investment property, it’s time to decide how you’ll manage it going forward. If you plan on renting it out yourself, ensure you understand all applicable laws regarding tenant screening and management. You may want to consider hiring a professional management company if managing tenants does not interest you or is out of your comfort zone. Here are some tips to help ensure success:
- Set clear expectations – When managing tenants, ensure they understand what is expected of them, including rent payment due dates, parking, noise levels rules, etc., costs associated with repairs/maintenance, etc., so everyone knows what to do upfront.
- Manage finances wisely – Monitor all finances related to the unit, including monthly rent payments, expenses related to repairs/maintenance, etc., so there are no surprises when it comes time to file taxes or pay bills.
After completing all the steps to purchasing your first investment property, the final step is maintaining it. Ensure all bills are handled, and the property is kept up to code for any tenants. Consider landscaping and interior design to improve your property's appeal and resale value. With proper management and budgeting, your first investment property can serve as a reliable source of income for years to come. Contact for more information.