Buying a rental property can give you long-term investment benefits and can be your best financial decision. Building a portfolio for your first real estate property brings positive investment returns, around average annual returns of 10.6 percent, favorable tax benefits, and a long-term passive income.
Investing in real estate and buying rental property can be very helpful in acquiring more property and generating cash flow, leading to an increase in wealth. However, it can be daunting. Buying real estate property has its own perks, but there are certain things you have to make sure, before investing in real estate for the first time, such as property management and quality of the deal.
You can rely on others’ experiences for this investment project; it will save your money, time, and stress, helping you invest in the right property without worrying too much. This Guide will help you find out the right things to do to avoid unnecessary hassle or issues and how to confidently invest in real estate.
What Steps to Follow to Buy an Investment Property?
When it comes to investing, you have to very carefully analyze, check, and assess the factors and facts that could influence your investment and the management of your property. There are things you need to check thoroughly. Here's how to analyze and assess the needful things for your investment:
Knowing Your Goals
Setting your goals is the most important step in analyzing the factors affecting your long-term investment benefits and management of the property. Considering your goals will help you identify the reasons for your investments, as well as the type of property suitable for you, such as single-family rental property, multi-family rentals, or commercial property, and what aligns with your requirements for the first-time investment plan.
You can ask yourself some questions and check for the properties based on the answers, such as:
- What’s your goal for this purchase?
- Are you investing solely for monetary gains, or do you have property development goals?
- What do you think about successful property ownership?
- Does a certain property align with your long-term goals?
- Is your goal a quick ROI or buy- and hold -strategy?
- Do you want to expand your ownership from one property to another or plan on investing in other properties later?
Once you set your goals for the investment and analyze your requirements, you can go ahead to the next steps. knowing your long-term goals and investment plans sorts things on many levels. You become able to set realistic expectations and find the right type of property that aligns with your financial and overall needs.
Assessing Your Budget Plans
Analyzing properties based on your goals and comparing them with your budget plan and the amount you have set to invest can give you an outlook for the right type of property you should invest in. Once your goals are clear, you can focus on budget planning or the already planned budget you have. Buying a real estate property can be fruitful and act as a good investment in the long run. so deciding your budget plans comes in handy. you have to consider things like:
- Available budget in cash
- How much are you ready to invest
- Down payments could be around 15%or more
- Other costs and expenses on repair and maintenance
Home inspection costs could be around $330, whereas home appraisals can be around $500-$800. Meanwhile, closing costs are 2-5% of the property purchase price. You can reduce the upfront costs by house hacking; to do so, you can live in one unit of the property and get conventional loans with lower down payment and interest rates.
Estimating the Cash Flow
Forecasting the cash flow helps estimate the cost of owning a property in comparison to the rent and other income you receive, such as maintenance costs, and property taxes. Positive cash flow means more money returns.
The average annual cash flow for rental properties is approximately 7-8% of the purchase price. So, if you buy a property for $350,000, the cash flow should be at least $28,000 yearly or about $2,333 monthly.
Selecting a Market
Choosing a market for your investment is a very crucial step to make sure you’re investing in the right property and market. In order to select a suitable market for your investment, you need to check the population growth, employment rates, job growth, income levels, rental and vacancy rates, etc. For analyzing a market and if it brings positive cash flow, you can take help from a local real estate agent, join networking groups, or active real estate investors in that specific market. Discussing with property managers would be a better option to understand a specific area’s real estate market. Contacting people who know the city’s attorneys, contractors, and property managers is very crucial.
Getting Early Approval
To show your interest and seriousness towards a property or market, you can get approval from the lander, which will help you understand the details of the investment plan, such as what you can afford, the terms of your loan, and the cash flow, etc. You have to provide your lender the necessary information, such as your financial information, your personal details, documents for verification of income, assets, your bank account statements, rental history, etc.
Finding out the time this process takes is crucial; it could take a day or up to a week, or sometimes more, for approval. The lender verifies all the necessary information. For a conventional loan, a credit card score of 620 is deemed ideal. The lender will help you get verified earlier if you provide all the necessary details. Your debt to income (DTI) ratio is assessed by the lender before approving you, which measures your ability to manage the monthly payments and ideally should be 36% or less.
Looking for Property
You have two options while looking for property to invest in when you’re ready: off-market listings and on-market listings. Properties listed in on Market listings are open to everyone and are advertised to the public, leading to transparency in price and more competition. Off market listings are properties not listed publicly and kept confidential. Buyers do not have to face competition, and the prices can be negotiable.
You have to take an investment real estate agent's help to find the best suitable on-market listings; they have access to information and databases which can guide you better. Off-market listings require research and hard work. You have to find information about off-market listings by talking to fellow investors and doing your research in a particular area. You can directly meet homeowners for properties listed for sale by owners.
Making an Offer
When you decide on a property to invest in, you can make your offer with the help of an investment agent who will help you make a Market analysis to make sure you get the desired property for the best price. You have already made the budget plans before finding the right property. You can decide what amount you want to pay by negotiating with the seller. You can find out what aligns with your budget and other calculations for that specific property. You can negotiate on contingencies such as property appraisal, investment financing, needed repairs, and additional assets that come with the property.
Financing:
When you’re done with everything and have made your offer you will require these documents for financing:
- Copy of sales contract
- Your ID, social security and driver’s license
- Information of employment w-2 forms for the last two years Self-employment documents
- Bank statement documents and investment additional asset or income information such as alimony and child support
- Monthly debt list
- Information about other properties you own
- Down payment gift letters
- References
- The entire process of financing can take up to 30 to 45 days, and the cost of appraisal can be $500-$599 but it can be $800 for larger properties. The lender will conduct a home appraisal to determine the property's value and that they are not lending too much.
Hiring a Property Manager
Hiring a property manager can be very beneficial for first-time property owners and their experience and expertise in local laws, rental markets, tenant management, screening potential renters, collecting rent, handling maintenance, and overseeing the eviction and turnover process. In order to find a suitable property manager, you can visit the properties they manage, take interviews, and see how they work.
Closing on the Property
Before completing the paperwork and signing the deal, look for any remaining repairs. Leave the property in the care of the property manager. Investing in real estate for the first time and buying your first property is a big achievement, and you can finally celebrate your hard work and be proud. Your investment will ensure passive income and help you grow in the long run.
Growing Your Portfolio
Staying updated in real estate investment means embracing continuous learning. You have to understand that the market evolves constantly. So, attend industry webinars, follow seasoned experts, and invest time in credible online courses. You could even go the whole hog and study for a real estate license online.
After you’ve secured your first property successfully, you can grow your portfolio. Maintaining your property and managing your tenants well is very essential. If your tenants are satisfied, you can always expect a Lower turnover and vacancy rates, enabling you to charge more.
While maintaining your current property, you can look for other properties and acquire them through the profit you earn with your first investment. Now, you know about market trends and have gained knowledge about market listings and other important things to buy real estate properties. You can use your knowledge to buy more properties.
You might make a few mistakes while investing for the first time, but you’ll learn a lot during the process. You have to just stick with your project and keep reinvesting your gains in other properties in order to have more profits and returns.
Investing in real estate property for the first time isn’t easy, but you can follow these steps to gain insight into the process. You can do your research before investing to make sure you don’t make many mistakes.
