The first step in real estate investing is simple; buy an investment property. It sounds easy. However, the truth is, buying your first investment property can be intimidating. Is buying rental property even possible if one is a first time home buyer? Is buying investment property while renting possible? Is buying investment property before your first home even allowed by banks? The good news is that you can break into real estate investing before you are an established homeowner. Here is Mashvisor’s guide to buying an investment property to rent when you are just starting out.
To learn about the 10 things you need to look out for when buying investment property, check out our video below:
Buying an Investment Property Before Your First Home – The Financing
If you plan to buy an investment property before you own a home, begin on the financing side. If you are in an unusual situation and have piles of cash to invest, you can jump to your search. Let’s face it, most people wondering, “should I buy an investment property” don’t have that luxury. If you plan to buy an investment property at any time, you need to have the capital planned in advance. When you want to buy an investment property before your first home, it is particularly important.
Before you buy an investment property, start by establishing the best credit rating you possibly can. That means using credit cards wisely. It means you will need to have a vehicle loan that you have a record of paying on time. Most importantly, it means avoiding any credit missteps like late payments.
The next step in preparation for buying an investment property is to save some money for a down payment. You may be able to buy an investment property with no money down. However, it will be very difficult. If you do pull it off, your costs of financing are going to be unusually high. Investment property loans already carry a higher interest rate than loans on a primary residence. Add zero equity to the mix and you will be paying a very high rate.
It also helps if you have access to the right real estate investment tools like a rental property or Airbnb calculator, especially if you plan to go the rental business route.
How to Buy an Investment Property as a First Time Home Buyer
Buy your first investment property to rent at the same time you buy your first home. Many real estate investors break into the business this way. The plan is simple. Buy a multifamily home or a home with an accessory dwelling unit. You will need to reside in one of the units, and the other unit or units become your rental investment properties. This is called owner-occupied investing.
Related: Top 5 Tips for First Time Real Estate Investors
Banks have strict rules about investment property loans. You will need to show that you have good credit, a big down payment (20% or more), and a rent roll plan. As a first time investor, you don’t have these things in most cases. However, you can use the owner-occupied rules to your advantage.
Owner-occupied rental properties allow for banks to approve FHA loans with low down payments. These loans mean that, as a first time homebuyer, you can break into real estate rental investing quickly. You need to live someplace anyway. Why not live in your investment?
Owner-occupied rental properties are a great way to buy an investment property at any time in one’s real estate business. However, it is ideal at the beginning. One reason is that the loan requires that you occupy the property for a number of years, typically two. Only after that can you move out and on and rent the whole property out.
This can be a useful time for you as an investor. You can add equity with improvements and the value of the property can rise over time. You can then either sell at a profit or use a cash-out equity loan to help finance other real estate investments.
Related: 10 Steps to Buying Your First Rental Property (Don’t Skip #7!)
Choosing a Location as a First Time Home Buyer
As a first time homebuyer with an eye towards buying investment properties, your priorities are different. This is not your “forever home.” You don’t have to be in love with the setting or neighborhood. You are most likely going to buy and move out in a handful of years and your children may be young or a family only in the planning stages. Look for the best value. Your guide to where to buy an investment property is where the best return on investment is.
Related: Location, Location, Location: Is Location Really All in Real Estate Investing?
Investment properties for sale may not look like the cozy single-family home of your dreams. There may not be a white picket fence. A garage is unlikely (though always a bonus for value). In fact, the uglier the home, the better in many ways. It reduces your buy price. The opportunities for equity gain through improvements are higher.
A multifamily is not usually one’s first choice for a long-term residence. The best place to buy an investment property may not be in the best neighborhood in a given city. What you are looking for is future rental income, not short-term vanity.
Mashvisor has a great investment property calculator to help you predict your cash flow from your owner-occupied rental property.
Take the Step
A first time homebuyer can certainly purchase a rental property. Doing so puts one into the real estate investment game early. This is a wise strategy for an important reason that is often overlooked. One way to earn money in the real estate business is to have your property grow in value over time. The sooner one enters the market, the longer the property can accrue in value. The long game is only possible if you have a long time horizon.
The truth is, the hardest step to take as an investor is the first one. Savvy real estate investors know that every property one owns can be viewed as a potential rental property. Planning ahead to purchase one’s first property as a rental property investment makes good sense.
For more help with locating investment property for sale, check out Mashvisor’s search tool. If you are already looking at a specific property and need a cash flow calculator or ROI analysis tool, Mashvisor got you covered as well.
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