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When it comes to investing, real estate is where it’s at. Buying a first investment property, for example, can set you up for a lucrative passive income and blast open the doors to a world of other investment opportunities.
That said, investment property is among the largest assets you can purchase. And just because it can generate passive income doesn’t mean you don’t have to work for your money. If you go into your first property full-speed without having the necessary knowledge or decision-making skills, you can put yourself in a bad financial position.
A lot goes into becoming a successful real estate investor. You must learn how to identify a profitable property, qualify for a loan, find good tenants, determine how the property will be managed, and much more.
Investadisor doesn’t want you to get yourself into financial trouble. We want you to set the stage for long-term success. That’s why we’ve provided this essential guide for buying your first investment property!
Confirming It’s the Right Move
Real estate investment is not for the faint of heart, and rushing into it unprepared can leave you in a tough spot. Along with paying for a mortgage and operating costs, you have to factor in tenants. And any real estate investor can tell you that much of your experience will depend on whether you have good or bad tenants.
To minimize risks, first-time investors can get onto the property ladder with a cheaper first purchase – then gradually spend more each time they buy another rental property. This means their risks are spread out and they’ve got a number of potential rental properties to make sure the first one doesn’t ruin them financially if it goes wrong.
Another key investment property purchase consideration is to buy a rental property that is cheaper in the beginning.
This first investment property is very important. It can be used as an opportunity for first-time investors to learn about the process of managing first investment properties while also getting some experience first hands
As a first-time investor, real estate will come with more risks than, say, putting money into the stock market. But it can also result in a higher return on your investment (ROI). Plus, real estate investment can be profitable no matter the overall state of the economy. In other words, owning property is always a good thing!
Managing the Property
One of the most important decisions you will make when buying a rental property is whether or not you will take care of the property management yourself or hire a professional company. Do you want to be a landlord?
Along with making any necessary repairs on a moment’s notice, managing payments each month, landlords often have to deal with an array of other tenant issues—many of which are confrontational or unpleasant.
If you choose to manage your own property, make sure you have the personality and dedication to do it well.
For example, if you purchase a property and it needs a fence, you will be responsible for installing the fence or having a professional do it. Fortunately, it’s easy to find contractors to handle tasks like this. Simply search online “local fencing companies near me” to connect with various candidates in the area.
Just make sure any candidate you consider is licensed and insured, and plan to pay an average of $4,500 for a new fence installation. After selecting a few different fencing companies, interview each one and read online reviews before getting estimates.
Since managing property comes with a lot of responsibility, you might consider making room in your budget for hiring a professional property management company. And this is the case even for your first investment property. That way, you can focus on the financial side of things and plan future investments while also keeping your work-life balance in place.
Seeking Preapproval for a Loan
When you consider buying a rental property for the first time, you should start to research properties before securing financing, which can prove problematic. For example, if you find the ideal property in the ideal location, and you have not been preapproved for a mortgage yet. That property could be sold and belong to another buyer by the time you go through the preapproval process.
Figure out how much house you can afford, and seek preapproval now so that you can be ready to close the deal when you find that perfect rental home. Moreover, preapproval is the best way to figure out what type of loan you will qualify for.
Even if you can afford to pay cash for your first investment property, you should still consider obtaining a mortgage. Here’s why LEVERAGE: If you ever want to purchase multiple properties, you will have more money in the bank to do it. Say, for example, that you have $125,000 in cash.
You will get a bigger cash flow on your first property if you sink that $125,000 to purchase it. But that means that you’ve tied up all of your cash into one asset.
On the other hand, if you pay a 20% down payment and get a mortgage on your first property, you will have $100,000 left to put towards two or more additional properties – leverage it or your cash is stretched. Over time, that can give you a greater return on investment.
You will probably need to go with an agency loan for your investment property. But that doesn’t mean you won’t have a variety of options to choose from.
Agencies like PennyMac offer many different types of home loans, and they will go out of their way to help you secure a mortgage when buying your first investment property. You can see what they offer by going to their website.
Choosing a Good Property
Many factors go into determining whether an investment property is a good or bad purchase. And there are just as many strategies and approaches you can take as well. One option is to look for a short-sale home.
This will result in a lower purchase price yet it’s not as risky as buying a foreclosed home. If you go this route, however, you will need to be prepared for the process to take several months, and you might need to put money into major repairs on the property.
While you shouldn’t avoid all properties that require repairs, you want to be cognizant of how many repairs will be needed for the property as well as the extent of the repairs. You may want to steer away from the most severe fixer-uppers.
Though you might get a great deal, there could be serious problems with the structural integrity of the home or other major repairs that will require a lot of time, energy, and money to fix. Not only can this take the joy out of buying a rental property, but it can also affect your cash flow and make it a bad real estate investment.
Moreover, be sure that your first investment property is in a location that will attract the type of tenants you are aiming for. Create a tenant profile, and don’t choose a rental home unless it promises to draw good tenants who will pay the rental rate you establish.
Speaking of location, research different areas, and make sure your investment property has critical amenities nearby, for instance, school, bus or train stop, grocery stores and other attractions.
Estimating the ROI of a Property
The primary purpose of becoming a first-time investor in real estate is to make money on the property you purchase. If the rental home is not going to bring a net positive cash flow or profit, then it’s not going to be a good investment.
Find the property’s net annual income, which is the amount of rent money after taxes, insurance, anticipated repairs, HOA fees, and all other expected costs are taken out. Take that number (net annual income) and divide it by the purchase price you paid for the rental property.
This will give you the ROI. For instance, if your annual income on the property is $9,500 and you paid $115,000 for the property, your expected ROI will be 8.2%. Be sure to use this method to calculate the ROI of any investment property you are considering.
Selecting a Rental Rate
Another essential step when purchasing your first investment property is to determine what you will charge for rent. Many experienced investors use the 1% rule; this suggests that you should charge at least 1% of the amount you spent on the property.
So, bringing back the property that sold for $115,000, would mean setting a monthly rental rate of $1,150. As a first-time investor, you may need to adjust this method in the early stages and accept a little less. But start with the 1% rule!
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Buying a first investment property is not always easy, and managing one can be even harder. But if you prepare and come at it with the right approach, there are some things that you can do to make sure that it’s a successful first investment as you’re less likely to have experience in this realm of homeownership. It’s important to educate yourself before you start looking at rental properties.
It’s also good to have an understanding of what your monthly income will be so you know what type of property is in your price range.
Once you find a first investment property to buy, the next step is getting it ready for rental. This will include following best practices set out by industry standards and laws – not just for safety reasons but also because these things will help protect your first investment property from any potential damages and give you peace of mind that things are being done properly.
You also need to think about how you want to avoid taking on too much financial risk. One way of doing this is by factoring in how much your monthly income will be. A new property often doesn’t bring in enough money to cover day-to-day costs, so it’s important to account for the expenses you’ll have on top of paying for rent.
Consider the tips above as you set out to find the ideal property. In no time, you’ll be building an empire and raking in a ton of passive income!
If you found this article helpful, you can read much more personal finance content on Investadisor.com!