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So you want to own investment property because you know real estate can make you money in at least 4 different ways, right?
But how do you get started? How do you buy your first investment property?
That’s what we’re tackling today. We have a simple 5-step plan to help you buy your first investment property!
Quick side note: It’s helpful to buy your own home first so you get a feel for real estate transactions and real estate ownership before you start investing. But it isn’t required. Lots of millennials mistakenly believe that, because they want to be free to move around, they can’t buy property. And that’s crap. You can totally invest in real estate even if you don’t want to own your own home.
With that, let’s jump into how to buy your first investment property.
Step 1: Make Sure You’re Financially Ready
Duh, right? But you’d be surprised at how many people get in over their financial heads. Before you buy your first investment property, make sure you have these basics covered.
Enough (verifiable) Income
You need to make enough money to cover your existing debts and expenses PLUS the mortgage, insurance, taxes, and maintenance on the investment property.
If you’re thinking, no, I’ll rent out the property, so the mortgage, insurance, taxes, and maintenance will all be covered, remember, you’ll have some time when the property isn’t rented. It may take you a little time to find your first tenant, and you’ll have some downtime between tenants.
And your lender knows this. So they aren’t going to lend you the money to buy an investment property unless you can prove (through pay stubs,bank statements, etc) that you make enough to cover the new property even when it’s vacant.
Great Credit
Do you know your credit score? It’s hugely important in getting you a loan for your first investment property.
Your credit score is basically just a number that indicates how well you use credit. Have you always made payments on time? Do you take on too much debt? Do you have enough of a history of credit usage for banks to determine whether you’re a safe borrower?
The higher your credit, the better interest rate you’ll be able to get on your loan. Generally speaking, you want to have at least a 720 to buy your first investment property.
Savings
You need to have enough in savings to cover at least a 20% down payment. You might see lenders offering loans with just 5% down. But those are almost always reserved for people purchasing their own home, not investment property. If you can save enough to put 25% down, you might be able to get a better interest rate.
But the down payment is just the beginning.
You’ll also need to have enough in savings to cover:
- Closing costs (appraisals, inspections, taxes, insurance, title searches, and loan origination fees). Costs vary by market, but they’re usually somewhere between 2 and 5% of the purchase price.
- Repairs and renovations.
- Payments until your first tenant moves in.
- Unexpected expenses (plumbing, electrical, and HVAC issues happen routinely without warning).
So, yeah…investment property requires a serious upfront investment. That’s why only a small percentage of people are willing to buy investment property. And why that small percentage gets to reap all the rewards that come with it!
Step 2: Get Pre-Approved
If you feel good about your finances, it’s time to find a lender and get pre-approved for a mortgage. Yes, this should happen before you even start looking at properties!
Here’s why:
- Good real estate agents won’t work with you until they know you can qualify for a loan once you find the right property. They’ve seen too many buyers waste agents’ time and then fail to qualify
- for a loan when the time comes.
- Smart sellers won’t accept your offer to buy their property unless your pre-approved. As soon as a seller accepts your offer, their house goes off the market. They’re not going to take their house off the market for you unless they’re sure you can qualify for a loan to actually close the deal. This uncertainty is why sellers often prefer all-cash offers over buyers who will need a loan to complete the transaction.
To get pre-approved, you just need to apply for pre-approval with the lender of your choice.
You can shop lenders online (usually comparing them by interest rates and customer service) to find the right fit for you. Then just give your chosen lender a call or start your application through their website.
Step 3: Get a First-Rate Real Estate Agent
Once you’re pre-approved, you can start interviewing real estate agents.
Do you really need an agent? YES!
Especially when buying your first investment property. They know more about the ever-changing local markets than you ever could because they spend over 40 hours/week immersed in it. Their knowledge and expertise will be invaluable to you.
Oh, and it doesn’t cost you anything! Real estate agents (both the seller’s agent and the buyer’s agent) are paid by the seller. You get an expert to personally guide you through the process, and the seller pays them. Getting an agent is a no-brainer.
Google local Realtors® and find 3-5 with good websites and blogs. A good web presence is an indication of a modern agent who understands tech and how to keep current.
Contact those agents and set up face-to-face interviews to see which agent is the best fit for you.
Step 4: Analyze Properties
With your pre-approval letter and first-rate real estate agent in tow, you can start analyzing investment properties.
Naturally, this is a topic all its own. Entire books exist to help you analyze real estate investment opportunities.
You can consider fixer-uppers to renovate and flip or renovate and rent out. Or you can consider a turn-key investment (a property that already has tenants in place and is already earning an income).
Paula Pant of Afford Anything has this EPIC blog post to help explain the different ways to analyze investment properties. Seriously, this is the most helpful resource I’ve seen on the topic. Read and learn, people!
Step 5: Buy Your First Investment Property
That’s it! All your prep work is done, and you’ve found your first investment property.
Your agent will help you make an offer, open escrow, work through the inspections and appraisal, and actually buy your first investment property.
Now you’re a real estate investor and the fun really starts…
Want to learn more about buying and managing investment properties? Here are 5 books to teach you all about it!
