As the year comes to a close, it’s an excellent time to set goals and make plans for the coming year. If you’ve decided to go ahead and purchase your first investment property this coming year, congratulations! Buying real estate property can be a great step towards securing your financial future. So, if you’re seriously planning on becoming a real estate investor, take the time to read our 6-step guide and learn how to buy your first investment property. We also share three tips that beginner property investors should definitely keep in mind as they get started with real estate investing. So, without further ado, let’s jump right in.
Step 1: Hire a Real Estate Agent
For a new player in the real estate investing game, hiring a real estate agent is essential. Experienced agents have been in the industry for a long time, meaning they have knowledge of the real estate market that you may lack. As a result, this makes them qualified for answering your questions and providing you with advice to help you reach your investment goals.
Not only that, but your agent will rid you of many daunting tasks associated with buying an investment property, like handling paperwork and negotiations. And the best part is, you do not pay a fee to a buyer’s agent! In real estate transactions, the seller’s agent is the one who gets a commission. If you, as a buyer, came to them with your own agent, then the seller’s agent splits his/her commission with your agent.
Find a top performing real estate agent near you.
Step 2: Set Your Finances in Order
There are plenty of options available for financing your first investment property. As you’re learning how to buy your first investment property, you might start considering going for mortgage loans. Different loan options come with different benefits, so you need to choose the right loan option that best suits your financial standing and goals. However, there a few things you need to sort out before going for a mortgage loan.
First of all, unlike the 3% down payment on the house you’re living in, you’ll need a greater down payment (at least 20%) for buying investment properties. Moreover, as you shouldn’t be carrying debts with your investment portfolio, make sure you clear all of your debts (like student loans, medical bills, etc.) before getting started in real estate investing.
Lastly, our US housing market predictions point to rising mortgage rates. While mortgage rates are currently lower than they were during the recession, the 30-year fixed rate mortgage will reach 5% by the end of the year. But don’t let this discourage you from buying your first investment property – instead, it should further motivate you to make the purchase as soon as possible!
Step 3: Study the Real Estate Market
A key to how to buy your first investment property is the same as any year: understanding the market. Just because you live in an area, doesn’t mean you know what the rental market is like or how it’s going to perform in the future in terms of returns and capital growth. It’s even more important to do your research if you’re considering investing in real estate outside of your local market.
Thus, property investors need to do a real estate market analysis to ensure their income property is situated in the best location to reach the returns they’re expecting. This requires studying data, inventory, neighborhoods, housing market trends, interest rates, construction costs, and market needs. While it’s a lot of work, it’ll help you make the best investment decisions.
Mashvisor makes this step easier for real estate investors buying investment properties. With the power of AI and predictive analytics, you’ll get to understand all aspect of any city and neighborhood for real estate investing opportunities. Some of the data we provide for property investors include median property prices, traditional and Airbnb rental income, traditional and Airbnb cap rates and cash on cash returns, as well as Airbnb occupancy rates. These are all important factors that you should take into account when performing a real estate market analysis.
To learn more about our product and how we will help you make faster and smarter real estate investment decisions, click here.
Step 4: Calculate the Numbers
You want to buy an investment property to make money from passive income. Of course, investing in real estate doesn’t come free of costs – there are mortgage payments, insurance, repairs, taxes, etc. The worst thing that could happen to you as a beginner property investor is not keeping up with these costs as it’ll affect your cash flow and overall return. Therefore, never make the jump into real estate investing without doing the necessary calculations.
Start with calculating the money that you already have and what you can borrow before buying your first investment property. Next, estimate how much it would cost to buy and renovate the income property. Don’t forget to include the closing and operation costs as well! Calculating all these numbers beforehand is an important step in our guide of how to buy your first investment property as this will ensure buying a positive cash flow property that will yield a good return on investment. (Check the last step for details!)
Step 5: Start Your Property Search
While you can count on your real estate agent to find you an investment property for sale, you can also carry out your property search online on your own. This can be easily done with Mashvisor’s Property Finder. This is a heavily customizable investment tool that allows any real estate investor to find the best investment properties based on his/her own criteria. Simply enter the city (or up to 5 cities) where you’re looking to buy an income property. Using different filters, select the:
- Property type (single-family, multi-family, condo, or townhouse)
- Rental strategy (traditional or Airbnb)
- Budget
- Number of bedrooms and bathrooms
After setting up your criteria, our investment tool will show you a list of the best real estate investment properties for sale. These are properties that match your preferences AND have the highest return on investment in the area. Thus, our Property Finder makes it possible for you to find your first income property and complete your property search in minutes!
Click here to start your 7-day free trial with Mashvisor and subscribe to our services and get a 15% discount after!
Step 6: Analyze the Investment Property
The last step to how to buy your first investment property is to analyze the property that you’ve found. Not any real estate property will make a profitable investment, and an unpleasant financial surprise is the last thing property investors need. So, the first thing you need to do is request a home inspection to assure that the real estate property is up to standard and doesn’t have any major issues that could cost you later on.
The next, and probably most important step is to analyze the property’s profitability or potential return on investment. In real estate investing, there are different factors that impact how profitable an income property is. These include the:
- Rental income
- Rental expenses
- Cash flow
- Occupancy and vacancy rates
- Cap rate
- Cash on cash return
As mentioned in step 4, there are also a number of one-time costs (like down payment and closing costs) and repeated costs (like monthly mortgage payments and insurance). Remember to include these in your investment property analysis to evaluate whether or not a certain property will bring high profits.
Related: How to Do Investment Property Analysis
For help with this step, check out our Investment Property Calculator, which also serves as an Airbnb calculator. Yet another real estate investment tool that Mashvisor provides to property investors. It provides all of the above values readily calculated for investment properties that are currently listed for sale on the platform. You can adjust the values to analyze the income property quickly and efficiently.
Another use for this tool is to perform a comparative market analysis using rental comps. This allows you to make sure you find an income property that will yield maximum returns.
To analyze and compare the best investment properties in your city and neighborhood of choice to find the best one, click here.
Additional Tips on How to Buy Your First Investment Property
Tip #1: Don’t Let Your Emotions Control You
When you’re buying a home where you’ll live for many years, it’s perfectly fine to listen to your heart rather than think about it logically. However, real estate investing isn’t about emotions; it’s about economics. Getting emotional as a real estate investor means making poor investment decisions. You could end up paying more for the income property than you should have. Remember, the lower the price you pay for a real estate property, the better the odds that you’ll earn a higher profit from it. Therefore, it’s best to think of it as a business and not let your emotions get the best of you.
Tip #2: Select a Low-Cost Home as Your First Investment Property
Even if you are ready to invest up to a million dollars in your first income property, it’s always a better idea to go for properties that lie in the lower- to mid price ranges. Some real estate experts advise beginner property investors to go for properties that don’t cost more than $150,000. Moreover, remember that you’ll need to spend more on renovations of the investment property before renting it out or selling it. Furthermore, keeping your investment low helps you stay in the safe zone because, even if you don’t make the expected profits, you won’t risk losing too much on it.
Tip #3: Understand Real Estate Taxes
Tax deductions are one of the many benefits of investing in real estate. As a beginner property investor, you may not be familiar with what you can deduct. So, while you’re figuring out how to buy your first investment property, it’s a good idea to talk to a certified public accountant about how to maximize tax deductions. Saving double digits on taxes allows you to automatically build more in profit from your first investment property.
For more real estate investment tips, read: The Best Real Estate Investing Tips for Beginners
The Bottom Line
Investing in real estate could earn you a good chunk of money and many still consider it to be one of the best ways to secure financial independence. While the housing market is constantly changing, many predictions and trends indicate that the current year is still a good one to invest in property. After reading this blog post, you now know how to buy your first investment property. Once you follow our steps and tips, you are ready to make an offer on the investment property you are interested in purchasing.
Are you ready to start your property search? Sign up with Mashvisor and find the income property of your dreams in a matter of minutes!