Buying Your First Investment Property
If you’ve ever lived in a rental home or ran a business from a retail space, you rented property from a real estate investor. Owning properties is a great way to protect your wealth and pass on a legacy to the next generation. With the right real estate investing techniques and the help of good property management companies, you can also become the owner of a rental property.
It’s said that the first step is always the hardest to take, and buying your first investment property is no different. How do you get your first property, and what are some tips you should keep in mind in this novel home-buying journey?
How to Buy Your First Investment Property
Deciding to buy your first investment property is a big deal. You must be intentional with your choice and have your finances and time expectations in order. To do this correctly, you should work with a real estate agent that specializes in helping investors. These professionals can help you find the right properties to generate rental income and help you avoid typical pitfalls, making it easier to make a return on investment.
Option #1: Borrow against your primary residence.
If you own a single-family home, it’s possible to do a cash-out refinance or use a home equity line of credit (aka HELOC) and use your home’s equity to pay for an investment property. It’s important to fully understand your repayment responsibilities.
This can be an excellent option for homeowners who have accumulated substantial equity, especially since most HELOCs have an advantageous interest-only repayment plan for a certain time slot.
Option #2: Get a loan.
If you don’t want to borrow against your home, you can apply for a conventional loan. Borrowers asking lenders for an investment loan should expect to pay a bigger down payment compared to borrowers of a primary residence.
Putting more money down will give you better loan terms and more cash flow since you will have a more manageable mortgage payment. Experts recommend a down payment above 20%, even at 25% to reduce risk.
To get a loan on an investment property, you must find a lender and get prequalified. Here are some general criteria that lenders look for:
- A Minimum Credit Score of 680.
- For W-2 Employees: Job History of at Least Two Years with Tax Returns.
- For Self-Employed: Five years of Tax Returns and Income Paperwork.
- Enough Money for a Down Payment.
- List of All Assets and Liabilities (ask your lender what they are looking for to be prepared).
- A Low Debt-to-Income Ratio (DTI). Ask your lender what is their ideal for a benchmark goal.
Method #3: Save up for all cash.
When it comes to making an offer on an investment property, nothing beats a cash offer. It’s the best for your bottom line because there is no interest to pay back, no monthly payments for a loan, and you can be one of the most competitive offers since you can offer the whole price of the property upfront. It’s ideal to snag distressed properties that can sometimes have difficulty getting financing due to defects like an old roof.
- Pro tip: To build equity faster or save for an all-cash payment, you can try “house hacking” or renting part of your main home for rental income. You can rent out your shed as a storage unit or a basement to a friend to knock out your mortgage faster than via regular mortgage payments.
Method #4: Crowdsource your investments.
Your first investment property doesn’t have to be all on you. If you don’t have a million dollars to invest in a vast multifamily property, you don’t need to give up on your dream. There are quite a few ways to invest in a property with a group of people.
Whether you want to form an LLC with some trusted people and manage a home as a group or start small on a real estate crowdfunding platform, you have choices where you can spend as little as $100 to get a slice of the pie. REITs are another option for those who want to indirectly invest in real estate.
Tips for Buying Your First Rental Property
Now that you have some options to get started on the financial side of things, here are some tips on how to acquire the right type of property for your needs.
Tip #1: Take over an occupied rental.
Taking over an occupied rental mid-lease can be a simple way for a new investor to start. These are advantageous to investors since they already have a tenant so there is no worry about filling the rental or dealing with a fixer-upper. Having a national property manager with the know-how to deal with a variety of situations will also make this new transition easier for new investors.
Tip #2: Pick a market that works for you.
It takes time to understand what market serves you the best. Whether you want to stay local or invest across state lines to diversify your portfolio, a fair amount of real estate market research is necessary to pave your path. By understanding what renters want in a particular market, you can pick properties with the ideal monthly rent price to make it easier to fill.
Tip #3: Have backup savings.
Experienced investors know that life happens, which is why it’s good to have a capital reserve account for emergencies. Having as much savings as possible, with at least 6 months of living expenses in the bank, is a good baseline to pursue before you become a first-time investor.
Tip #4: Understand holding costs.
When you own a rental property, you will be responsible for holding costs. This includes the “forgottens” like property tax, maintenance costs, or utilities when the home is in between leases. You must be prepared for these in the rare case of an eviction or other kind of emergency.
Tip #5: Always get a home inspection when you can.
Due diligence is crucial before you become a rental property owner. Getting a home inspection before you buy can take away a lot of the risk of holding an investment, a must in the age of higher interest rates and when purchase prices are trending higher due to low inventory. A home in good condition will reduce your overall operating expenses since there will be less to fix.
Buying Your First Investment Property with Marketplace Homes
If you are interested in buying your first investment property, give the realtors at Marketplace Homes a call. We also advise you to work with your preferred mortgage lender and investigate your finances to be prepared for a down payment, closing costs, and other basic factors to prepare you for the journey ahead.