Have you ever become engrossed in the details of real estate investing, saying, "I could do that," or even, "I want to do that," but not being able to decide where to begin? If so, you're in luck, since this Redfin post was written specifically with you in mind.
The process of purchasing your first investment property has the potential to be both thrilling and lucrative. But let's face it: without the proper information and direction, the complicated world of real estate investing may be scary. But don't worry. We will reveal a wealth of expert advice and priceless insights in this comprehensive guide, enabling you to confidently handle the procedure. You'll be given the knowledge and techniques to easily enter the world of real estate investing and purchase your first investment property, from establishing relationships to carrying out due diligence.
Let's get to the tips on buying your first investment property
1. Get advice from professional investors
There is no better way to learn about real estate investing than from people who have actually done it. Your comprehension of the process, which starts with market research and ends with either the sale or securing a tenant in your new rental, can be greatly improved by learning from seasoned investors. By figuring out how you can assist other financial pros, you can even learn from them.
This is inaccurate, according to Kathie Russell, a board member of the North Carolina Real Estate Investors Association. "I hear many new investors say that they don't feel they have anything to offer, but that is untrue," she adds. Everyone can contribute in some way. Someone will benefit from whatever you perform as part of your employment or as a hobby, I promise. Find your local REIA, she continues, to start forming ties with investors. "For novice or aspiring investors, these groups are an absolute necessity. There, you'll get to know your lenders, mentors, friends, and advisors.
2. Put your group together
Putting together a solid group of experts with real estate investment experience can offer crucial direction and support. Knowing who will be making decisions about your investing strategy and process is crucial, according to Eric Feldman, SVP of Sales and Marketing at Longhorn Investments. Since everyone in the world of real estate investing is looking to get the best bargain and properties move rapidly, having a team of reliable people in place is crucial.
A skilled real estate agent who is familiar with the neighborhood market and can point out potential investment opportunities is someone you should seek out. Having a capable real estate lawyer on your side can also guarantee that your legal rights are safeguarded throughout discussions and contract signing. An appraiser will assist in determining the true value of a property, which can save you from paying too much. Working together with a qualified property inspector can help you spot potential problems and avoid expensive future surprises. The last thing that can be done to simplify property renovations and daily operations is to build relationships with trustworthy contractors and property managers.
3. Use market research
Doug Van Soest, the company's founder, appropriately underlines the potential hazards associated with purchasing an investment property when it comes to real estate investing. However, by using the data that is already available, these dangers can be reduced. Van Soest advises performing an exhaustive comparative market analysis (CMA) with the abundance of information at your disposal to comprehend the situation of the industry at the moment. You can reduce some of the risks involved with real estate investing by considering variables including property prices, rental rates, vacancy rates, and historical trends.
4. Take long-term equity gains and area potential into account
Purchasing your first investment home does not imply that you will live there. You should think about a location's potential and potential long-term equity gains when deciding where to make a buy.
The city of Manor, Texas, is happy to present Scott Jones, the city's director of economic development, as a shining example of a place's potential. Manor either already has it all or is striving to get it as we speak, according to Jones. "Manor is a short drive from all that Central Texas has to offer. This entails a lot of land that is accessible and reasonably priced for construction, a top-notch educational system, first-rate public safety and utilities, mass transit to Downtown Austin, and much more.
Significant housing expansion has been observed in Manor, Texas, year over year. The typical sales price was $234,000 in May 2020; as of May 2023, it is $350,000 (almost a 50% year-over-year rise). Getting advice from neighborhood experts and real estate brokers can make it easier to spot emerging places that have the potential to be key players in high ROI prospects.
5. Examine your lending choices
Investigating your lending alternatives is crucial when making your first investment purchase. Your financial well-being might be significantly impacted by comprehending and evaluating mortgages, government-backed loans, and private financing. To make an informed choice that is in line with your investing objectives and long-term stability, do your homework and speak with professionals.
Lender, HomeAbroad has some advice on loans with a high debt-service coverage ratio (DSCR). "DSCR loans examine the property's income potential and cash flow to determine loan eligibility, whereas traditional loans may demand income and debt to income. DSCR loans are the best option for investors looking for investments driven by cash flow because they don't take investors' income into account.
6. Exercise due diligence in legal matters
Big Law Investors' creator Joshua Holt exhorts real estate investors to recognize the significance of performing thorough legal due diligence before making a purchase. In order to further clarify this, Holt advises "checking the title deeds to ensure there are no hidden encumbrances or disputes, reviewing zoning laws and local ordinances to ensure that the property can be used as intended, and double-checking that all taxes are clear."
After purchasing a home for a short-term lease, the last thing you want is to learn that local regulations prohibit such arrangements, advises Holt. It's crucial to carry out legal due diligence before buying a property to protect your investment and steer clear of expensive legal problems down the road.
7. Always get a property inspected before making a purchase
A house inspection is essential for finding any problems with a building. Home inspections can also help an investor establish their budget for renovations and reduce any additional stress that arises during the restoration process.
Austin Home Renovations general contractor Ronnie Jackson advises consumers to "never purchase a property without an inspection provided by a licensed real estate inspector." Jackson further says not to "complete your option period without having that inspection evaluated by a professional contractor."
8. Remember to pay your taxes
Taxes do play a big part in real estate investing, indeed. The first category is property taxes. "When buying a real estate investment property, one of the most critical factors during your due diligence or underwriting process is correctly modeling the property taxes owed going forward," says Tony Trahan, a property tax consultant with KE Andrews. This valuation, which is heavily negotiated, influences your taxes in several states.
Another tax to think about (and budget for) is capital gains tax, particularly if you plan to sell your investment property. Long-term and short-term capital gains taxes are both available. The tax paid on profits from the sale of assets that have been owned for one year or less is referred to as short-term capital gains tax. Ordinary income tax rates apply, and they can change based on a person's tax bracket. On the other hand, profits from the sale of assets held for longer than a year are subject to long-term capital gains tax. For investors who retain their assets for a long time, long-term capital gains tax rates are frequently lower than ordinary income tax rates, providing possible tax advantages. The individual's income level and the kind of the item being sold determine the precise long-term capital gains tax rates.
9. Make an outstanding offer
You should be ready to move quickly and provide a compelling offer with alluring conditions when placing an offer on your first investment property, including a pre-approval letter, a sizeable earnest money deposit, and flexibility on closing dates. While being competitive is important, it's as necessary to make sure that your offer supports your financial objectives and enables a successful investment.
10. Getting insurance
Make sure you have enough insurance whether you're holding a property as a rental or are in the repair phase of your house flip. Structure, improvements, and fixtures should all be covered by comprehensive property insurance that protects against dangers like fire, theft, and natural disasters. To cover any lawsuits or claims by third parties for injuries or property damage, liability insurance is essential. While rental property insurance is especially made for landlords, covering structures, liability, and lost rental income, builder's risk insurance can protect against losses during construction or remodeling.
The landlord coverage, according to Pegram Insurance Agency, "can help protect you financially in case of damage to your property or liability claims." Pegram Insurance Agency says that "there is a considerable difference between renting to long-term tenants and renting on Airbnb/VRBO. Understanding which coverage works best for your scenario is crucial. Consult your insurance provider if you need particular endorsements for additional coverage for Airbnb and short-term rentals.
11. Start Whenever You Are
Start where you are is remains the single most crucial piece of advise I've ever received or offered. Your (ultimate) goal may be to own a five-star hotel in the heart of the city, but if you can first buy, renovate, and rent a single-family home, do it. Start small and work your way up to bigger projects. Before hiring a property manager, be aware of what it takes to run a property; borrow modestly to invest large.
12. Take into account your cash flow
"If the market were to tank tomorrow and you are still happy you own the property, then you have the right property," was the best investment advice I've ever received. Making ensuring the investment has a solid positive cash flow is one way to do this. In this manner, you continue to pay down the principal, continue to get cash flow, and continue to benefit from the property's tax advantages. Consequently, you don't mind a price reduction.
13. Renting out your home
Jordan Davey, head of digital marketing at Victory Property Management, offers advice on everything from minimizing rental hazards to optimizing the number of applications received if your financial strategy calls on renting out your property. Davey emphasizes conducting background checks on every candidate and cautions landlords to "not take rental applications at face value." Get proof of your salary, and keep an eye out for anything that seems off.
Additionally, Davey advises collaborating with your real estate agent to appropriately price the home. It's crucial to avoid underpricing a rental property while also avoiding overpricing. To decide a pricing that best reflects the needs of your market, do your research and carefully examine the CMA.
Bottom Line
Buying your first investment property can be an exciting and possibly profitable venture. You can position yourself for success by taking important elements like market research, financial analysis, and professional advice into consideration. Keep in mind that the process requires meticulous planning, a long-term outlook, and a readiness to change as necessary. Take the plunge, seize the chances, and start your real estate investing career now.
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