Buying an investment property is the first step to enter the real estate investing business. For a beginner real estate investor, this could be both an exciting and intimidating jump. However, with sufficient knowledge, experience, and the right tools, you’ll realize that the process of buying an investment property is not as complicated as what you might have thought.
So, what are the steps property investors take for buying an investment property?
Step 1: Hire a Real Estate Agent
A real estate agent is a licensed professional that has the task of representing both buyers and sellers in a real estate transaction. An agent’s tasks will, of course, be different depending on what end of the deal they are on and which party they represent. When buying an investment property, you’ll need to hire a buyer’s agent – especially if you’re a beginner real estate investor.
Hiring a real estate agent requires that you add the agent’s fees to your property expenses. Because of this, many beginner real estate investors ask “why should I hire an agent when I could save money if I buy an income property myself?” The answer to this question is simply because real estate agents are professionals who’ve been in the real estate investing business for a much longer time than you. Therefore, they have the experience you lack when it comes to buying an investment property.
Your real estate agent will rid you of the daunting tasks and the next steps of buying an investment property like negotiating deals and handling paperwork. Moreover, a buyer’s agent will find the income property that meets what you’re looking for. Efficient real estate agents are also able to identify areas with high demand for real estate investing and properties with high profitability and a good return on investment. Beginner real estate investors can also consult with their agents and they, in turn, will answer questions and provide advice to help investors achieve their goals.
Step 2: Get Approved for a Mortgage
A major concern for beginner real estate investors is how to finance buying an investment property. There are plenty of investment property financing methods for a real estate investor to choose from. The best financing option for you depends on your financial standing and what you can afford. However, seeing as most beginner property investors don’t have bags of money to start investing in real estate with all cash, the most common way to finance buying an investment property among them is with a mortgage.
Assuming this is your financing option for buying an investment property, you need to get pre-approved for a mortgage as soon as you start looking for a potential income property. So, go to the bank and ask about the different types of mortgage loans to find which one works best for you. In addition, make sure to discuss how much you can afford to buy for. This will depend on your startup capital (if any) and the expected rental income from the income property that you want to invest in.
Moreover, buying an investment property with a mortgage comes with interest rates which are different from one real estate market to another. So, make sure you ask about interest rates on investment properties in your real estate market as well.
Step 3: Do the Math
The main goal of buying an investment property is to start making money and have a stream of passive income. The worst thing that could happen to a real estate investor is losing money and not keeping up with the costs that come with real estate investing. Thus, never make the jump into real estate investing without doing the necessary math!
When you have an idea of which mortgage loan is best and what you can afford, you need to do some further calculation. Expect your mortgage lender to request a minimum down payment of 20% of the income property’s purchase price. When calculating the down payment and purchase price of the income property, don’t forget to include closing costs as well.
Buying an investment property also brings different expenses such as monthly mortgage payments, income property taxes, insurance, costs of repairs and maintenance, etc. Don’t underestimate these expenses as miscalculations will lead to buying an investment property thinking it’ll generate positive cash flow and yield a good return on investment when in reality it will end up eating up your profits.
Step 4: Find the Right Investment Property
When searching for an income property, property investors usually have some criteria or certain features they want to find in their future income properties. For example, you might be interested in buying an investment property of a certain type (single-family, multi-family, etc.) or in a certain location. Your real estate agent will take care of this step – as mentioned, it’s the buyer’s agent’s task to find investment properties that meet what property investors are looking for.
Alternatively, you can make use of Mashvisor’s investment property finder! This is a powerful and heavily customizable real estate investing tool that allows any real estate investor to search for investment properties based on specific criteria using different filters. This tool also comes with a heat map feature which allows property investors to find investment properties much faster using visual cues. With Mashvisor’s investment property finder, finding and comparing different investment properties across the US housing market can be done with a click of a button.
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Step 5: Perform Investment Property Analysis
After finding an income property that suits your needs and criteria, as a real estate investor, you need to analyze the expected profitably of this property before making the purchase. In the real estate market, different investment properties have different profitability based on values like the cash on cash return, cap rate, rental income, and occupancy rate. Therefore, the next step of buying an investment property is calculating these values to determine whether or not this income property will bring high profits and a good return on investment.
You might be wondering how you’re going to calculate these values and ensure accurate results. Well, with Mashvisor’s investment property calculator, this is not something to worry about! This is another real estate investing tool that Mashvisor provides to any real estate investor. It’s a versatile tool that allows you to calculate the above-mentioned values related to buying an investment property (both traditional and short-term Airbnb investments).
This tool also provides readily calculated values for investment properties that are currently listed for sale. As a result, property investors can easily analyze different investment properties in the same location to find the one which will yield the highest profits and return on investment!
Step 6: Close the Deal
After analyzing the income property and ensuring its profitability, the next and final step to buying an investment property is to approach the seller and make an offer. This is another step that your real estate agent will take on for you. He/she will fill in all necessary papers, negotiate closing costs with the seller’s agent and lender to bring you the best possible prices, and close the real estate transaction. Thus, even though you’ll have to add an agent’s fee to your expenses, having a professional take care of the hard work for you when buying an investment property is definitely worth the money.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Final Words on Buying an Investment Property
Buying an investment property is not a walk in the park, but the perks of real estate investing definitely make the process worth your money, time, and energy. If you’re a beginner real estate investor, remember that starting any type of business is intimidating at first but with time and experience, you’ll find yourself a real estate pro. Follow the above steps to buy your first income property and enjoy the many benefits of the real estate investing business!
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