Real estate investing can be an excellent way of building wealth for the future – when it’s done correctly. A lot of people are jumping into the real estate market. However, it takes careful planning for your property investment to reach success. If you’re a first-time real estate investor thinking of buying an investment property, then you must be filled with questions. “Where should I buy?” “Which type of property is best?” “What costs should I keep in mind?” The list goes on.
Mashvisor works to help property investors (both experienced and beginners) make the best investment decisions for a successful real estate investing career. In this article, we explain the 4 key factors for property investors to consider before buying an investment property for the first time. So, without further ado, let’s jump right in.
#1 Location, Location, Location
Location will always be the first factor to consider before making any type of investment decision. Where your rental property is located can make or break your investment! In real estate investing, location determines demand, property values, rental income, appreciation, and many other factors that control the success and profitability of investment properties. Thus, when buying an investment property for the first time, a real estate investor has to assure it’s in the right location.
Many beginner property investors stick to investing in their local real estate market. However, your local market might lack the necessary factors required to make a profitable investment, making it a bad location for buying an investment property. Successful property investors first perform a real estate market analysis to evaluate the profitability of real estate investing in a certain location.
As a real estate investor, it’s important to ensure your location is healthy because if it rises, the value of your rental property will rise as well. For example, if you buy a distressed investment property in a location expecting high appreciation in the coming years, 10 years from now you might be a proud owner of a very expensive rental property! We’re not saying to go ahead and buy distressed investment properties – what we’re trying to say is that the first consideration should be the specific real estate market where you’re buying an investment property.
Related: Location Location Location: What Makes for the Best Place to Invest in Real Estate?
#2 Property’s Type and Condition
When buying an investment property, it doesn’t have to be your dream house! From condos and apartments to single-family homes and townhouses, there are many types of investment properties available in the market. If you’re buying an investment property for the first time, you’re probably asking yourself which type is the best in the real estate investing business. We can’t say that there is one type that outweighs the rest – what’s best for one real estate investor might be a bad choice for another.
This investment decision depends on factors like your target tenant, financial abilities, and, of course, location. Nonetheless, for beginner property investors, the smart thing to do is to start small – a single-family home or a few apartment units – these are easier to manage so you won’t be overwhelmed. A fixer-upper, on the other hand, is not a good idea for a first-time real estate investor. Although buying an investment property for a cheap price and then flipping it is quite tempting, these are risky investment properties and, without the necessary skills, you’re likely to spend too much on renovations.
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Another thing to keep in mind when buying an investment property is its conditions. Be sure to work with a qualified professional to conduct a thorough home inspection. Determine the necessary repairs and major issues that you have to fix and calculate how much they’ll cost and the time needed to complete them. It’s not worth it for property investors to buy a rental property that will be vacant for a long time as it won’t be making any rental income.
#3 Positive Cash Flow
Cash flow is an attractive feature of real estate investing. It is the profit property investors make taking out their monthly rental expenses from their monthly rental income. However, in order to enjoy this benefit of investing in real estate, the property has to generate positive cash flow. This means that monthly rental income covers the monthly rental expenses. On the other hand, negative cash flow means the rental property is not making enough rental income to cover rental expenses. So basically, you’ll be losing instead of making money.
Successful property investors always look for positive cash flow investment properties simply because these are guaranteed to yield a good return on investment. Positive cash flow also pays down a real estate investor’s mortgage when buying an investment property, leading to increasing the property’s equity. Moreover, positive cash flow tends to increase over time, allowing property investors to make even more money from their investment properties with each passing year.
Never buy a negative cash flow rental property thinking it’ll appreciate with time and turn into a positive cash flow one. This is one of the worst mistakes a beginner real estate investor should avoid!
Related: Real Estate Investing 101: How to Find Positive Cash Flow Properties in the US Housing Market
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#4 Estimated Rental Expenses
You should always consider your finances before buying an investment property. First things first, can you financially handle a property investment? Meaning, does a property investment make financial sense and align with your financial goals? First-time property investors need to have a stable income and an emergency fund in order to break into the real estate market without experiencing financial burdens.
Next thing to keep in mind is your rental expenses. A real estate investor has to estimate their down payment, monthly mortgage payments, costs of repairing and maintaining the rental property, property taxes, insurance, and prepare for unexpected expenses. Therefore, conduct a financial analysis before buying an investment property, otherwise, these expenses could eat into your profits and keep you from generating a good return on investment. Speaking of return on investment, don’t put your money in a property investment without checking what your potential return might be.
Related: Calculate the Return on Investment – Guide and Examples
To easily estimate your potential return on investment, use Mashvisor’s rental property calculator – a real estate investing tool that allows property investors to calculate the different values related to a rental property, including the cash on cash return, cap rate, and rental income. To learn more about our product, click here.
Final Words on Buying an Investment Property For The First Time
Buying an investment property is a huge step in securing your financial future. By carefully considering the above factors, a first-time real estate investor can make sure to make smart investment decisions. Sign up to Mashvisor to get immediate access to our property finder and rental property calculator and ensure finding the best investment properties in only 15 minutes!
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