How to Buy Your First Real Estate Investment
Written by Ashley Sutphin Posted On Monday, 13 September 2021 00:00
Being a real estate investor sounds like a lofty goal, but it may be more within your reach than you realize. Real estate investing doesn’t have to mean you have a massive portfolio, although maybe someday that’s the goal.
Buying your first investment property is enormous and likely pretty intimidating as well.
The following are general things to keep in mind that can apply universally regardless of your budget.
Determine Your Goal
The first step in buying your first real estate investment is to know what your goal is. Do you want to generate capital fast, or do you want passive income? Both are reasonable goals, but you have to decide which is right for you.
Until you know what your goals are, even the best real estate agent isn’t going to be able to provide you much help as far as finding the perfect property.
Most new investors decide to buy a property they’ll then rent out.
Ideally, the rent you earn covers your mortgage and expenses.
Are you cut out to be a landlord, though? How handy are you? If you aren’t handy at all, you need to factor in the cost of things like maintenance and repairs that you’ll have to pay someone else to manage.
You should pay down any personal debt before you invest in real estate too. For example, student loans, medical bills, and credit card debt need to be paid off before you can realistically be a real estate investor. You want to give yourself financial breathing room.
As you decide on your goals, it’s critical that you understand all the risks.
For example, a real estate investment can end up staying vacant for longer than you planned, but you have to pay the bills regardless.
You might also run into very large, unexpected maintenance bills. For example, you could have to replace an air conditioner or get a new roof.
Another downside to plan for is what you would do if you have a tenant who stops paying the rent. It takes time to evict someone, and you may never get the months of unpaid rent back.
We’re talking primarily in this guide about investing in a rental property, but buying a property flip also comes with its own set of challenges. For example, it’s almost always the case that the work you do to a flip will cost more than you expect. There’s also the chance the home could stay on the market for much longer than you plan for, meaning you’re going to have higher costs to carry your investments.
Save a Down Payment
If you’re going to buy an investment property, you’ll typically need to put down more money than you would if you were buying a home as your primary residence.
You’re likely to need at least 20% for a down payment, and mortgage insurance isn’t an option on a rental property.
While you’re saving your down payment, you should have two other financial goals. First, build your other cash reserves in case something doesn’t go according to plan. Also, work on raising your personal credit score because you’ll need it to be as high as possible to get a mortgage with favorable terms.
The Mortgage Process for an Investment Property
If you’re going to buy a property as an investment rather than a primary residence, you need to do some calculations to see what your rates and monthly payments might look like. Then, from there, you can get preapproved, so you’ll know precisely how much money you can spend.
Working with a home loan expert with experience in investment properties is beneficial since the rules are different from buying a primary residence.
One of the biggest mistakes new investors make is not securing financing before looking for a property.
Get preapproved so that you can move quickly if you find a property, and avoid being upset if you find a house you want and then realize you don’t qualify for enough financing to buy it.
Other than a down payment, if you’re buying a rental property, you’ll need to provide at least two years of tax returns, two years of your W-2s, and two months of bank statements. They’re also going to verify your assets.
A lender will also want to ensure you have at least six months of mortgage payments set aside if you face any unexpected challenges.
The biggest takeaway from all of this is that you need to do your research and be prepared. Investing in property can be the best thing you do, but it can also be the worst in terms of financial mistakes if you’re not ready to go into the situation.