Have you ever been captivated by the ins and outs of real estate investing, declaring, “I could do that,” or even, “I want to do that,” but couldn’t pinpoint where to start? If so, you’re in luck because this Redfin article is tailor-made just for you.
Buying your first investment property has the potential to be an exhilarating and profitable adventure. However, let’s face it: the complex landscape of real estate investing can be intimidating without the right knowledge and guidance. But fear not. In this all-encompassing guide, we will unveil a treasure trove of expert tips and invaluable insights that will empower you to fearlessly navigate the process. From relationship building to conducting due diligence, you’ll be equipped with the knowledge and strategies to enter the world of real estate investing and buy your first investment property with ease. Let’s get started!
1. Learn from experienced investors
When it comes to real estate investing, there’s no better way to learn than from those already doing it. Learning from experienced investors can vastly build your understanding of how it works, beginning with market research and ending with either the sale or signing a tenant in your new rental. You can even learn from other investor professionals by identifying if there is a way you can help them.
“I hear many new investors say that they don’t feel they have anything to offer, but that is untrue,” says Kathie Russell, a board member of the North Carolina Real Estate Investors Association. “Everyone has something to offer. I guarantee that something you do in your day job or as a hobby will be helpful to somebody.” She adds that to begin building your relationships with investors is to find your local REIA. “These groups are an absolute must for new or aspiring investors. There you will meet your lenders, your mentors, your friends, and your advisors.”
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2. Assemble your team
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Building a reliable team of professionals who specialize in real estate investment can provide invaluable guidance and support throughout the process. Eric Feldman, SVP of Sales and Marketing at Longhorn Investments stresses the importance of knowing who your decision makers are regarding your investment strategy and process. Within the world of real estate investing, everyone is trying to secure the best deal, thus meaning properties move quickly – so having a team of trusted individuals in place is essential.
You should identify a knowledgeable real estate agent who understands the local market and can help you identify promising investment opportunities. Additionally, having a competent real estate attorney can ensure that your legal interests are protected during negotiations and contract signings. An appraiser will help identify the actual value of a property, which can help you avoid overpaying. Collaborating with an experienced property inspector can help identify potential issues and prevent costly surprises down the line. Lastly, establishing relationships with reputable contractors and property managers can streamline property renovations and day-to-day operations.
3. Rely on market data
When it comes to real estate investing, Doug Van Soest, founder of SoCal Home Buyers, wisely emphasizes the potential risks involved in buying an investment property. However, these risks can be mitigated by leveraging available data. Van Soest suggests conducting a thorough comparative market analysis (CMA) using the wealth of data at your disposal to understand the current state of the marketplace. By examining factors such as property prices, rental rates, vacancy rates, and historical trends, you can make informed decisions and alleviate some of the risks associated with real estate investments.
4. Consider area potential and long-term equity gains
Buying your first investment property doesn’t necessarily mean it will be where you reside. When considering where to purchase, you’ll want to think about a location’s potential and the possible long-term equity gains associated with the area.
Scott Jones, the economic development director for the city of Manor, Texas, proudly showcases his community as a shining example of a location’s potential. “Manor either has or is working to have it all as we speak,” says Jones. “Manor is only minutes away from everything Central Texas offers. This includes abundant, relatively inexpensive land for development, a high-quality education system, first-class public safety and utilities, mass transit to Downtown Austin, and much more.”
Manor, Texas, has seen significant housing growth year over year. In May 2020, the median sales price was $234,000; as of May 2023, the median sales price equals $350,000 (nearly a 50% increase YOY). Consulting with local experts and real estate agents can help identify up-and-coming areas that can play a pivotal role in creating high ROI opportunities.
5. Explore your loan options
When buying your first investment property, it’s essential to explore the available loan options. Understanding and comparing mortgages, government-backed loans, and private financing can greatly impact your financial success. Research and consult experts to make an informed decision that aligns with your investment goals and long-term stability.
HomeAbroad, a service for connecting buyers to lenders, has a tip about Debt-Service Coverage Ratio (DSCR) loans. “While conventional loans may require income and debt to income, DSCR loans evaluate the property’s income potential and cash flow to determine loan eligibility. DSCR loans do not consider investors’ income, making them ideal for investors seeking cash flow-driven investments.”
6. Perform your legal due diligence
Joshua Holt, the founder of Big Law Investors, urges real estate investors to understand the importance of conducting comprehensive legal due diligence before purchasing a property. Holt expands on this by saying, “check the title deeds to ensure there are no hidden encumbrances or disputes, review zoning laws and local ordinances to ensure that the property can be used as intended, and double check that all taxes are clear.”
“The last thing you want is to find out that local laws prevent short-term lease arrangements after you’ve purchased the property for that specific purpose,” says Holt. “Conducting legal due diligence before purchasing the property is important to ensure you protect your investment and avoid costly legal issues later on.”
7. Never buy a property without having an inspection
A home inspection is pivotal in identifying potential flaws within a property. Home inspections can also help determine an investor’s renovation budget and help alleviate newfound stressors throughout the rehab process.
Ronnie Jackson, general contractor of Austin Home Renovations, urges buyers to “never purchase a property without an inspection provided by a licensed real estate inspector.” Additionally, Jackson adds that you shouldn’t “complete your option period without having that inspection evaluated by a professional contractor.”
8. Don’t forget about taxes
Yes, taxes are a significant component of real estate investing. First, there are property taxes. Tony Trahan, a property tax consultant of KE Andrews, shares that “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. In many states, this valuation determines your taxes and is highly negotiated.”
Capital gains tax is another tax to consider (and budget for), especially if you intend to sell your investment property. There are two forms of capital gains taxes, short-term and long-term. Short-term capital gains tax refers to the tax paid on profits from the sale of assets that have been held for one year or less. It is generally subject to ordinary income tax rates, which vary depending on an individual’s tax bracket. On the other hand, long-term capital gains tax applies to profits from the sale of assets held for more than one year. Long-term capital gains tax rates are typically lower than ordinary income tax rates, offering potential tax advantages for investors who hold their assets for an extended period. The specific long-term capital gains tax rates depend on the individual’s income level and the type of asset being sold.
9. Submit a competitive offer
When making an offer on your first investment property, you should be prepared to act swiftly and present a strong offer with attractive terms, such as a pre-approval letter, a substantial earnest money deposit, and flexibility on closing timelines. While it’s important to be competitive, it’s equally crucial to ensure that your offer aligns with your financial goals and allows for a profitable investment.
10. Get insurance coverage
Whether you’re in the rehabilitation stage of your home flip or are holding a property as a rental, you’ll want to be sure you’re adequately insured. Comprehensive property insurance should protect the structure, renovations, and fixtures, guarding against perils like fire, theft, and natural disasters. Liability insurance is crucial to cover potential lawsuits or claims by others for injuries or property damage. Builder’s risk insurance can safeguard against losses during construction or renovation, while rental property insurance is specifically designed for landlords, covering structures, liability, and rental income loss.
Pegram Insurance Agency elaborates on landlord policies, “which can help protect you financially in case of damage to your property or liability claims.” Understanding which coverage works best for your situation is critical; Pegram Insurance Agency adds that “there’s a big difference between renting to long-term tenants and renting on Airbnb/VRBO. Airbnb and short-term rentals require specific endorsements for additional coverage, so check with your insurance provider.”
11. Renting your property
If your investment strategy includes renting your property, Jordan Davey, digital marketing director of Victory Property Management, offers insights from mitigating rental risks to maximizing received applications. Davey highlights performing screenings on all applicants, reminding landlords to “not take rental applications for face value. Get income verification and be on the lookout for anything that may appear suspicious.”
Additionally, Davey recommends working with your real estate agent to price the property accurately. It’s important not to overprice a rental home, but equally important to not underprice. Do your due diligence and review accurate CMA data to determine a price best suited to your market’s demands.
A final note on buying your first investment property
In conclusion, purchasing your first investment property can be an exciting and potentially lucrative endeavor. By considering key factors such as market research, financial analysis, and seeking guidance from professionals, you can set yourself up for success. Remember to approach the process with careful planning, a long-term perspective, and a willingness to adapt as needed. So, take the leap, embrace the opportunities, and embark on your journey as a real estate investor.