The Ultimate Beginners Guide to Buying Your First Investment Property
So, you're ready to dip your toes into the world of real estate and buy your first investment property? Congratulations! As a beginner, navigating your first purchase is incredibly exciting and opens up a world of opportunity.
In this comprehensive guide, I'll walk you through the essential steps—from evaluating your finances and securing a loan to defining your investment strategy, outlining your criteria, and kicking off your search.
Start with Financing
Real estate financing options and how to get an investment property loan
You have a variety of options for real estate financing when you go to purchase your first property. If you’re not paying cash, which is an easier equation to navigate, you’re more than likely going to need a loan.
There are innumerable loan products available out there but there are a handful of factors that will determine your eligibility for them and how much you can borrow As a result, this will impact the purchase price of a property you can afford.
Before you skip ahead to getting a loan, it helps to do a quick evaluation of your current savings, debt, income, and credit score. You can start by asking yourself a few basic questions;
How much do I have in savings?
How much do I have in debt?
What’s the range of my credit score?
What’s my income and/or do I expect it to change in the near future?
By getting clear about your finances, it’s a pivotal moment to reevaluate if you’re ready to keep moving forward. Consciously make that decision for yourself and if you’re feeling comfortable moving forward, it’s time to meet with a lender.
A lender is a licensed professional who will help you borrow money from a financial institution and explain how to get approved for a real estate investment loan. Their first step is to take a deeper look at your financials, similarly to the way you did, but they’ll have access to more information through their credentials. They’ll pull your credit history and are a phenomenal resource to ask any questions you have any getting pre-approved or what happens after you’re pre-approved.
Don’t be intimidated by a pre-approval. It is an indicator of eligibility for a loan and clarifies your purchasing power. Getting pre-approved does not mean you have to buy a house but it will tell you what you can and cannot afford. If you find out that you’re not pre-approved, a good lender will explain immediate next steps for you to work on your debt, income or savings to prepare to be pre-approved again in the future. For recommendations on finding a lender, check out commonly asked questions here or to read more about some of the most common financing options in Investopedia’s Complete Guide to Financing a Property.
Pick Your Strategy
Deciding on your investment property strategy and defining your property goals
Having clarity around your purchasing power will not only be illuminating, it will be vital to your next steps. Armed with a pre-approval, you’ll know the exact range of a home you can afford which may shape the investment property strategy you pursue.
You may have already had a strategy in mind and that’s great! Hopefully your budget still allows for this type of strategy but in case it doesn't, don’t panic. There are many investment strategies at your disposal.
Let’s get back to the basics with your goals. Here are a few questions to ask yourself;
Is the desired outcome cash flow, long term appreciation or something else?
Will you self manage the property or hire a professional? If you self manage, how much time can you devote to it?
Do I have additional financial resources to change or update this property?
What constitutes a successful investment?
As you think deeply about your options, it’s also important to consider the potential risks associated with whichever strategy you’re considering. There’s always a risk of market volatility when it comes to real estate but there are also unexpected maintenance costs, tenant turnover, and changing laws and regulations. Spend the time to deeply research your strategy so you can evaluate these risks and have a plan in place in case they occur.
Don’t skip over the question of how to manage your investment property because this is a totally new experience that’s not for everyone. If you are trying to decide whether to hire a property manager or self-manage your property, you can read my recommendations for things to think about if you’re about to become a landlord here.
For any investment, it’s a good idea to have an exit strategy and a house will be no different. Even after doing all of your homework on the strategy you want to use, there’s a chance that it might not work out the way you’re hoping. In any case, have a backup strategy that will still meet your financial goals to make sure you won’t end up losing money in the short term. For example, if your short term rental doesn’t end up getting any bookings, determine if this property can still generate cash flow as a long term rental. What about a house hack? It should have at least one other strategy that makes sense financially to qualify it as a viable investment.
Having trouble picking a strategy that’s right for you? Reach out and I’ll be happy to share more about my experience house hacking and owning a short term, mid term and long term rental.
Define Your Criteria
Specifying criteria for your investment property to optimize your search
With your strategy in mind, it's time to outline your investment criteria. You already know the purchase price you can afford and you’ve solidified your strategy. Now it’s time to narrow down the types of houses you’re searching for so you’ll be able to jump on an opportunity when you see it.
Based on your strategy, here are critical questions to ask yourself;
Where is the optimal location for this house to be located?
What are the property taxes in this county?
What are the zoning and permitting rules or regulations in this area?
What is the optimal size of the house?
How many beds, baths, and square feet are needed?
What additional amenities might be important? (washer/dryer, hot tub, etc)
What condition is viable and/or what repairs will be necessary?
I always recommend doing a market analysis for the location to consider what areas might offer the best opportunities for growth and rental demand. Your real estate professional is a great resource but also leverage tools like city plans, current demand on Facebook Marketplace, Furnished finder or new construction to supplement the long term perspective. Here’s a great example of how I conducted a market example for an out of state property that you can use for any location.
By the end of this section, you should have a very clear picture in your mind about what you’re looking for. This is called a ‘Buy Box’. The value of a Buy Box is that it’s essentially a checklist that you can review every time you a new investment property comes your way. Once you start you’re search, you can always reference this checklist to quickly make sure that this property meets all of your needs. If it doesn’t, do not go and see the property. If it does, consider it an option. I’ll reiterate that sticking to your Buy Box is imperative to staying focused. It will be easy once you start your search to get distracted by other properties but remember to go back to your list to help you stay on track.
Kick Off Your Search
Property search tips to get you started
With an explicit understanding of your finances, strategy, and criteria, it's time to begin your search. Here are some of my property search tips to make your experience as efficient as possible.
Partner with a knowledgeable real estate professional to streamline your search process and provide valuable insights into the local market. You can absolutely use Zillow and other platforms to conduct a search but a licensed professional will have access to listings you might otherwise not see. Additionally, they’ll have experience writing offers and other contracts as well as navigating the transaction that you have yet to learn.
Use your Buy Box to see every property through an analytical lens. This is an investment property, not your dream home. Keep your emotions out of the decision and make sure it meets your criteria. Some compromise is viable but don’t sacrifice any aspects that will make or break your strategy (and backup strategy!!).
As you receive properties that meet your criteria, visit the potential investment property in-person to see if there’s anything not shown in the photos. It’s important to do a thorough walkthrough of the property and checkout features that could spell a major expense. For example, look at the age of the AC and furnace, look for any water damage, examine the foundation if possible to look for cracking. Don’t skip out on having an inspection on this home unless you’re planning to remodel yourself, it’s an important layer of protection, especially for a first-time investor.
Once you've found a promising option, don't hesitate to make an offer. Work closely with your real estate professional to negotiate terms that align with your investment goals. They’ll guide you through each step of the offer phase and help you navigate the due diligence time period. This is another opportunity for you to look critically at the property, having it professionally inspected, have the title insured and looking into the financial records for any issues that could surface in the future. Don’t hesitate to ask lots of questions and soak up the chance to learn as much as you can.
If you can stick with these tips, you’ll be ready to pounce when the right investment property hits your search. Work with your lender and real estate professional to gather additional insights and once you’ve factored in all the advice from this guide, you’ll be ready to get to the closing table.
Investing in real estate is not just about purchasing a property; it’s about making informed decisions that will yield long-term benefits. As a beginner, there’s so much to consider for your first purchase but by now, you should have a solid understanding of the essential steps needed to find a house that meets your investment goals. From evaluating your finances to securing a loan, defining your investment strategy, outlining your criteria, and finally kicking off your search, you’re on the way to becoming a real estate investor.
