The process of buying a house might come as second nature to most career investors. But for a beginner investor, it can be a terrifying idea.
Table of Contents
- Buying a House for Investment vs Primary Residence
- Step #1 – Financial Readiness
- Step #2 – House Hunting
- Step #3 – Investment Analysis
- Step #4 – Hiring Services
- Step #5 – Property Management
- Final Thoughts
It isn’t a secret that investing in real estate is one of the best ways to build a fortune in today’s capital-driven world.
While this lucrative idea occurs to most people, most wannabe investors end up too intimidated to make a step towards investment.
Whether it’s because of the intense competitiveness of the real estate market or the lack of fundamental knowledge needed to initiate an investment career, fear is the number one reason that prevents people from investing.
However, while buying a house for investment might seem like a convoluted process, breaking it down into a few simple steps can drastically help in alleviating the fears and doubts that many beginner investors have.
So, in this article, I aim to explain the five main steps of buying a house for investment in 2022 and to break down each step into simple questions and tasks that are easy to follow.
Buying a House for Investment vs Primary Residence
While there are similarities between the two, buying a house for investment is significantly more complex than buying a primary residence.
In both cases, the result is that you would own a house.
However, since they each have different goals, the steps you would take towards buying a house will differ when you’re buying it for investment compared to as a primary residence.
When buying a primary residence, your main goal is to find a place you can call home.
This means that your focus will be on the property’s form and functionality based on your taste and the lifestyle you want to have.
On the other hand, when buying a house for investment, your primary goal is to make a profit.
This drastically changes the approach that you must take when trying to find a house and make your decision.
So, as an investor, you need to know the difference and what to look for when buying a house for investment vs as a primary residence.
Investment Is All About Long-Term Profits
In either case, the process of buying a house revolves around short-term and long-term goals.
Generally, decision-making in each process is different at its core:
When buying a primary residence, you would rely on your own personal taste and lifestyle orientation, regardless of market trends and behaviors.
When buying a house for investment, you would base your decisions on profitability based on the market’s trends and forecasts, while your personal taste acts as a secondary factor.
Since real estate is known to appreciate in value over time, holding onto your property will almost always result in long-term profits, even in the case of your primary residence.
However, in the case of investment, you want to maximize these profits.
This means that you want your new property to generate as much money as possible to cover all its costs while still generating a profit.
Of course, this might not happen immediately.
Investors will often have to be creative and data-oriented to be able to project the future performance of their property and whether or not it will make a profit.
For this reason, the most important step for making a successful real estate investment is investment analysis, which predicts the future of your property and finances.
Location Is Key
Whether you’re buying a house for investment or as a primary residence, one thing is for sure: location is key.
Of course, choosing a location to buy real estate is one of the most important decisions you’re going to make.
However, that doesn’t mean that it’s the same process in both cases.
When choosing a location for a primary residence, you’re focusing on where you want to live depending on the duration of your residence, your family status, your job, and other personal factors.
For investment, however, you will be focusing on locations where you predict housing market growth that eventually leads to more profits from your investment property. Your location of residence plays a minor role depending on your involvement in the property’s management.
One thing for certain, however, is that in both cases you will be looking for a good place to live.
If you’re buying a house for investment, you still need to find a place where you believe other people will want to live.
Properties in undesirable residential areas might be cheap and tempting for beginner investors. But if no one will rent or buy from you, then your property will eventually become a failed investment.
Step #1 to Buying a House – Financial Readiness
The first step is figuring out how much buying power you have in order to know what to look for when buying a house.
Buying a real estate property is a major transaction that involves large amounts of money.
While house prices can vary greatly even within the same market, your available cash for investment has a fixed potential.
Since you have a finite amount of money available for investment, there are several questions to ask when buying a house regarding your finances and your potential to borrow money.
A first time home buyer will typically borrow money when buying a house for the first time.
If you’re buying a house as a primary residence, certain first time home buyer programs can provide financial help, such as down payment assistance.
The HUD housing assistance, for example, was created to help low-income families, elderly people, veterans, and the like.
As an investor, however, you will have questions to ask when buying a house that depends on your investment strategy and what your long-term plan looks like.
Ask Yourself: How Much Can I Afford to Spend?
Of course, you cannot buy a house if you don’t have the money to spend on it.
So, the first questions to ask yourself should be: how much can I afford to spend and how much money should I save before buying a house?
This comes down to your personal finances, available capital and assets, your annual income, and any available friends or family who are willing to lend you money for your investment.
Figuring out the answers to these questions is perhaps the hardest step in the process of buying a house, but you can hire a financier to make it much easier.
The general goal of this step is to draw out different scenarios based on your preferences and personal finances.
For example, you might have assets that you can liquidate but prefer not to.
In this case, you would have two financial plans. One that involves a smaller amount of capital but you avoid liquidating your assets, and another one with your full potential capital which requires liquidation.
By having two different financial plans, you can more accurately measure your investment potential at later steps to see which plan will be more profitable in the long term.
The results in this example can vary because investing smaller capital doesn’t necessarily mean that the profit potential is lower.
This means that sometimes it is best to not invest all of your capital in a new house, and you should always save some money to reduce the risk of your investment.
Ask Yourself: Do I Want to Take Out a Mortgage?
Another important question to ask when buying a house is whether you want to get a mortgage or not.
Most first-time home buyers will opt-in to getting a mortgage.
As I mentioned before, there are many first time home buyer programs that can help people who are buying a house with bad credit.
Investors, however, will often need a good credit score to get a mortgage.
However, even with a good credit score, getting a mortgage can be scary for beginner investors.
This is because investments can fail, which may lead to you defaulting on a mortgage, which in turn can have devastating financial repercussions.
But if you have all your finances sorted out as well as a solid plan and a thorough investment analysis, you can protect yourself and have a backup plan in place.
Also, it’s important to be aware that if you’re getting a mortgage, it doesn’t mean that you won’t need to use any of your own cash.
Most mortgage lenders will require a significant down payment of around 20% of the property’s price in addition to having a high credit score.
Keep that in mind when thinking about, “how much money should I save before buying a house?”
Ask Yourself: What’s My Investment Strategy?
Finally, deciding on your investment strategy at this point can greatly help you in figuring out your investment’s financial plan. You should also consider the type of property you should look for as well as the type of data and metrics that you need to collect.
There are several investment strategies that a beginner investor can use:
Three Common Real Estate Investment Strategies
- Buy & hold: this strategy revolves around appreciation—you will buy a new house for several years until its value increases, then you will sell it for a profit.
- Fix-and-flip: a strategy that revolves around buying distressed homes, fixing and/or rehabbing them, and then selling them for a profit.
- Rental: this is the best strategy for beginner investors, especially if you’re using a mortgage—you will buy a property and rent it out either for the short-term or long-term.
Each strategy has its pros and cons.
For example, a buy & hold is a good strategy for investors who are looking for the least amount of involvement, don’t care about generating a passive income, and want long-term gains.
Fixer-upper strategies, on the other hand, require a lot of work and involvement when it comes to fixing or renovating the house. However, they are a fast way to make a profit since the value of the property increases as soon as the rehabilitation is complete.
Finally, rental strategies are considered the best for beginner investors because they’re a middle-ground and are fairly safe. They require some involvement (unless you hire a property manager) and may earn a stable income.
I will be focusing more on the third strategy in the later sections.
For now, it’s worth mentioning that investors use the income from their rental properties to pay the mortgage payments while still generating a profit.
This is the main reason why it’s the most common type of investment property in real estate, especially among first-time home investors.
Step #2 to Buying a House – House Hunting
The second, and perhaps the most exciting step in the process of buying a house is house hunting.
This step is exciting for every beginner investor, and it often helps new investors define their tastes and preferences when it comes to buying a new house.
However, this doesn’t mean that this step isn’t without its challenges, obstacles, and tactics that real estate investors need to circumvent and learn.
During this step, questions to ask when buying a house revolve around the property itself and the space in which it exists.
Ask Yourself: Where Do I Want to Invest?
The first and foremost question to ask yourself in this step is: where do I want to buy a house?
As often repeated in the world of real estate, it’s all about the location.
I explained at the start of the article how location is key when it comes to finding investment properties that will make you a profit.
There are two main components of the location that need to be taken into consideration by beginner investors, and both are crucial for determining the success potential of your investment.
Location in Terms of Markets
As most people are aware, when deciding to buy real estate in any location, you will need to look at the market stats for that specific area.
It is easy to find general stats about the performance of the overall US housing market.
But the US is a massive country that is divided into different states, cities, and districts.
Each of state, city, and even neighborhood has its own market stats that can vary greatly from the larger market that it’s in.
In the first step of this guide, we talked about the importance of knowing your purchasing power or the amount of money that you have available for investing.
Based on the results of that step, you should have an idea of what sorts of markets you can afford to invest in, and which markets are out of your budget.
So, the market/s you end up choosing as the potential location for your investment can be narrowed down based on your available budget before moving on to other steps.
Location in Terms of Investment Value
Another aspect that you need to consider when determining the location is the investment value of that location.
What this means is that you don’t want to invest in any market that you can afford, but you instead want a market that will also grow and make a profit.
So, for example, you might have to choose between two markets that have similar median property prices, property size, and other factors.
In this case, determining the best option depends on that location’s growth and future developments and how they may affect your investment.
New businesses and schools opening or big tech companies moving into a new market can all be signs of that market’s growth potential.
If you want to invest in rental properties, you will want a market where rent rates are solid and/or expected to rise.
Of course, after a few years of experience, this all becomes second nature.
But if you’re a beginner investor, then you need to familiarize yourself with the type of data that you have to collect and how to choose markets based on that data.
Ask Yourself: What Type of Property Should I Get?
Naturally, when it comes to buying a house, you can’t do so without considering: the house!
If you ask 10 people what they see when they imagine a house, you might get 10 different answers.
This is because there are numerous types of houses in real estate, with some being extremely niche to specific locations.
Additionally, when talking about types of houses, there are multiple ways in which house types can be categorized.
Types of Properties in Real Estate
The first thing that comes to mind when talking about types of properties is categorizing them based on their general use.
Most people would categorize houses based on the following types:
- Single-family homes: These are properties that consist of a single unit and are designed to house one family. This is also the most common type of property among beginner investors.
- Multifamily home: In contrast to single-family homes, this type consists of multiple units and can house multiple families depending on the number of units. An apartment building or a duplex house can fall under this category.
- Townhouses: This is a type of single-family home that is attached to other similar properties on one or more sides.
- Condos: Another type of single-family home, condos are very similar to apartments. Instead of paying rent to live in it, tenants will pay the mortgage and gain more freedom to make changes and renovations to the property.
- Co-op: A unique type of property that is similar to condos. Unlike condos, however, a co-op is like a multifamily property where the residents of all units would own the building collectively.
It should be noted that single-family homes are the simplest and best option to choose when it comes to beginner real estate investors.
While there are investment strategies that revolve around other property types, they are considered more advanced and might increase your risk of failure on your first investment.
Property Types Based on Design
Regardless of the types listed above, properties can also be categorized based on their design aspects.
In terms of design, there are several types of properties with different aesthetics that appeal to different types of people.
While it isn’t as important as the previous types, having preferences regarding the design of the property can distinguish amateur from professional investors.
This is because the property’s design matters greatly when it comes to finding new buyers or tenants in the future, which determines the success of your investment.
Additionally, the design of the property is often greatly tied to the property’s location.
For example, cottage-style houses will mostly be found on the outskirts of cities, in rural areas surrounded by nature.
This makes them a niche type of property with a niche type of tenants, for example.
Understanding the location and the types of properties that exist there can help you better understand your potential future tenants and buyers.
As you gain more experience and establish more leads in the real estate world, you will better understand the pros and cons of each property type and the optimal audience to market it to.
Ask Yourself: Do I Want to Renovate?
Another important question to ask yourself when house hunting is whether you want to renovate the property or not.
Renovating properties can take up a considerable amount of cash that you would need to have saved and included in your plan.
Generally, when planning your finances, you might not want to invest all of your available cash in the down payment.
Instead, you will need to allocate an amount of money for closing fees as well as property repairs and renovation.
Depending on the amount you have saved up, you may be able to choose properties that require as little or as much renovation before you can rent them out or resell them.
Of course, while this is a decision that is best made during the financial planning step, you can make changes to your plan depending on the opportunities that you find in the market.
For example, if you have allocated part of your budget for renovation, you might find a newly built house that requires no renovation. However, it will likely be slightly more expensive than what you had in mind in terms of the property price.
In this case, the renovation budget can instead be added to your down payment budget to be able to afford this house.
On the other hand, if you don’t intend on renovating, you might want to focus your house hunt on newly developed properties or properties that were built within the past year or two.
However, if you don’t have a budget allocated for renovation, you would want to make sure to always get the house inspected thoroughly before buying it. You wouldn’t want to run into any surprises that you can’t afford.
Step #3 to Buying a House – Investment Analysis
If you’re intending on buying a house for investment in 2022, then the most important step for improving your chances and avoiding financial losses is to do a thorough investment analysis.
This step is what determines the investor’s skill and proficiency in carrying out a great investment and being consistent about it.
While it is impossible to predict the future with perfect accuracy, using data to determine the likelihood of different outcomes has become a staple in the business of real estate investment.
A real estate investment analysis allows investors to identify good opportunities and predict the future performance of investment properties based on historical market data.
In other words, by looking at current and past market data and by comparing properties with one another, you can learn all the necessary information about a property that you want to buy.
Of course, as a beginner investor, you’re probably already aware of the importance of investment analysis, but you need a breakdown to help you understand how it’s used in real estate.
The following are the general steps that investors need to take in order to carry out a thorough real estate investment analysis when buying a house.
1. Gathering Data
The first step that is needed for doing a real estate investment analysis is data gathering.
This includes all kinds of relevant data, such as property prices, rental rates, occupancy rates, property type, status, age, and size.
While you might not end up using all of the data you gathered, it is generally a good idea to collect as much data as you can and consolidate them in a spreadsheet that you can access easily.
Generally, although some methods are more popular or reliable than others, there are several methods for gathering real estate data:
- Driving around and looking for “For Sale” signs
- Visiting local forums and investor clubs
- Looking for newspaper listings
- Accessing official public records
- Using online platforms and social media
- Hiring a real estate agent
While hiring a real estate agent is the easiest and most common method used by beginner investors, it does come at a cost.
But real estate agents have access to the MLS database, which is where all the real estate data that are gathered by agents gets shared with other agents and realtors.
Getting access to this database can provide you with most of the data you need to conduct an efficient investment analysis.
However, nowadays it is becoming more popular to use online data sources and platforms such as Mashvisor to get all the data you need in one place without having to hire an agent.
While this won’t give you access to the entirety of the MLS, it does make up for it by giving you access to off-market properties and other useful tools.
2. Finding Real Estate Comps
Real estate comps are a type of comparative analysis that is crucial when analyzing properties.
When buying a house for investment, the value of that house as an investment property depends highly on how it compares to other houses in the same area.
A comparative analysis in real estate involves comparing similar houses in a specific area to measure each one’s potential compared to the others.
By using the data that you’ve gathered about properties in the area, you will want to narrow down your search to only show properties that have similar features.
Using an Excel spreadsheet, you can then add all similar properties and any additional data or metrics that you have on them.
Now, you can easily filter columns based on the metrics you want to use for comparison.
So, for example, you can sort properties based on their price to see which properties are the cheapest and which ones are the most expensive.
You can then sort the properties based on their rental income to see if there is a cheap property that is generating above-average rental income.
Alternatively, you can use return on investment metrics such as cap rate and cash on cash return to compare properties based on their projected rate of return.
Rate of Return Metrics
The cap rate and cash on cash return are two of the most used metrics for analyzing and calculating the rate of return that rental properties have in real estate.
As an investor, the return on investment is your ultimate goal.
So, knowing the rate at which each property will pay for itself is crucial for making your decision.
For this reason, it is important to learn about these metrics:
The capitalization rate is a metric that measures a rental property’s rate of return based on the property’s net operating income and its current market value.
In other words, this metric tells you how much of the property’s market value is being generated as income each year.
Cash on Cash Return
The CoC is another metric that is used to measure a rental property’s rate of return.
However, unlike the cap rate, the cash on cash return measures the rate of return based on the amount of cash invested in the property instead of its market value.
This is useful if you’re using a mortgage when buying a house, as it tells you what the rate of return is based on the amount of cash you paid in the down payment and on the closing costs.
3. Making Your Decision
Finally, after conducting your investment analysis by narrowing down and comparing potential investment properties, it is time to make your decision based on the analysis’s outcome.
At this point, you’re not looking for the one property that you will end up with.
Instead, what you’re looking for is a handful of properties that you would like to make an offer on.
Based on your analysis, these properties should make financial sense and represent the best options for investing in that market.
However, sometimes the data that you used for your analysis might change during negotiations.
For example, the property seller might decide to raise the price of the property, placing it out of your budget range.
So, having multiple great options when buying a house for investment is recommended to circumvent the obstacles that may arise during negotiations, house inspections, and appraisals.
Additionally, knowing about other options and their potential for investment can also help you in the negotiation process when discussing the deal with the seller.
Luckily, you don’t have to do all of these alone.
While hiring services comes at a cost, the value they offer is often worth it, as we will see in the next step.
Step #4 to Buying a House – Hiring Services
When asking how to buy a house, most people would tell you to just hire a real estate agent and they will do all the work.
While hiring services to help you in the process of buying a house can make it much easier, it can also be very costly.
So, as a beginner investor, you will instead need to decide on which services you would like to hire and which ones you’re willing to do on your own.
For example, you can hire a service to do the process of house hunting and analysis for you and will just give you a shortlist of properties that would meet your investment goals.
But when you’re trying to make a profit, cutting back on expenses can be very helpful, and this includes expenses spent on useful services.
The truth is, you can practically go through the entire process of buying a house without hiring any help at all.
But as a beginner investor, you might not have all the necessary knowledge, experience, or tools to do everything on your own.
You might feel more comfortable dealing with a professional who can guide and reassure you throughout the buying process.
This is why it’s important to understand what are the services available to you, how much they would cost, and whether you need them or not.
Real Estate Agent Services
Most investors typically hire a real estate agent, at least to close the deal.
Since most sellers use an agent when selling their homes, beginner investors will lack the expertise and negotiation skills to close the deal with the seller’s agent. That is unless they hire a buyers’ agent.
Other investors might also hire a real estate agent at an earlier stage of their investment journey, commonly during the house hunting stage in order to get access to MLS data.
But real estate agents can offer you much more through their network of professionals and other services for hire.
However, it is important to keep in mind that real estate agents work on a commission, and that applies to their networking skills as well.
Agents will typically have deals with other agencies and service providers and will get a commission out of these service fees.
This means that it is in their best interest that you pay for other services.
So, it’s important to keep that in mind when assessing your needs and whether you need your agent’s help with hiring other services or not.
Regardless, when it comes to closing a deal, hiring an agent will usually cost somewhere between 4–6% of the sale price.
Property Appraisal Services
A property appraisal is another service that is extremely common among real estate investors.
This is because property appraisal is a requirement when you want to borrow money from a bank for the purpose of buying a home for investment.
Although there are cases in which a lender may not require a home appraisal, it is generally a good idea to include it in your plan anyways.
Generally, home appraisals can end up saving you money when you’re buying a new house as they can tell you whether the value listed for the property is accurate or not.
In other words, a home appraisal can help you avoid buying a house that is worth less than the amount of money you will pay for.
Luckily, unlike hiring a real estate agent, home appraisal services don’t use a commission.
Instead, a typical appraisal would cost you around $300 to $400, with some metropolitan areas costing $1,000 or more.
It’s worth mentioning that if you’re buying a house in a metropolitan area, you need to be aware of the fierce competition there.
This competition means that you will generally need to rely on hiring services as a beginner investor and that these services will typically cost considerably more than in smaller markets.
Reparation and/or Renovation Services
Finally, when buying a house that isn’t newly built, the property will probably need to undergo some reparations and renovations.
These types of services are some of the most common in the real estate world, and you will find hundreds of options to choose from in each market.
As mentioned before, a real estate agent can typically help you in hiring good quality renovation or reparation services, but they might cost you more.
Additionally, it is highly recommended to hire a home inspector to look at the property and help you determine what needs to be repaired or rehabilitated.
Of course, while these services will make up a considerable portion of your investment budget, properties that need to undergo heavy rehabilitation will typically have a lower price.
If you’ve decided on doing a fix-and-flip or buying a foreclosed house in a distressed state, then it is essential to plan your finances around hiring these services.
In other words, you can allocate a percentage of your investment funds to hiring these services.
Then choose from the available options to find good quality services that you can afford based on your planned budget.
Step #5 to Buying a House – Property Management
The final component of buying a house for investment in 2022 is related to property management.
Basically, this is the step at which you ask yourself: who manages the property when I buy it?
When you’re buying a real estate property for investment, you as the new owner will be responsible for the property and what takes place in it.
As long as you own the property, you will need to manage it and make sure it’s up to standards depending on the purpose it’s being used for and the laws and regulations that apply to it.
If you’re buying a house to resell it, then you might not own it for a long time, which means that not much property management is needed.
Additionally, some types of properties, such as co-ops and condos that are part of the Homeowners Association (HOA), will provide property management on your behalf. However, it will come at a cost.
But when you’re buying an investment property to use as a rental, property management becomes essential.
Rental Property Management
When it comes to rental properties, you as the owner will become a landlord.
This means that everything related to renting out the property becomes your responsibility.
Things like finding tenants, making a rental/lease agreement, collecting rent, initiating an eviction process, and much more become part of your responsibility. Handling these tasks will also be integral to the success of your investment.
As a beginner investor, managing your rental property and being a landlord can be an exciting challenge that you can learn from. It can also help you improve your property and find ways to make it more profitable.
However, not all investors are willing to become landlords and manage their rental properties, as it can take a lot of time and effort to do so.
Therefore, most investors, especially those who own multiple rental properties, will hire property management services to handle all the landlord tasks for them.
But this comes at a considerable cost.
Depending on the types of services that you want to include, property management can cost you between 8–12% of your monthly rental income.
Of course, hiring property management also depends highly on whether you live in the same area as the property or not.
You can’t manage a rental property if you don’t live near it, as tenants will sometimes require your presence on short notice.
Final Thoughts on Buying a House for Investment
Buying a house for investment as a beginner investor in 2022 can be a very exciting venture.
While it can be scary to think about the required steps and the possibility of failure, overcoming those fears and realizing that you can learn and plan for your success can reap great rewards.
Understanding each step of the process of buying a house can help you prepare yourself and make decisions based on data and calculated predictions. Doing so will significantly improve your chances of success.
Luckily, in 2022 it is easier than ever to find online tools and platforms that can help you with all these steps without having to leave the comfort of your own home.
Mashvisor, for example, is the best tool for investors who are looking to buy rental properties and make a passive income in real estate.
The platform offers tools that will help you in the steps of house hunting and investment analysis.
Once you’re done building your financial plan and know what you can afford and how you’re going to pay for it, head over to Mashvisor and let the platform do the rest for you.
With the power of sophisticated algorithms, Mashvisor can help you locate the best markets and properties based on your finances.
It doesn’t stop there, however, as even an investment analysis can be done extremely quickly and with ease using tools like the rental property calculator
To start using our real estate investment tools today, click here to sign up for a 7-day free trial followed by 15% off for life on your Mashvisor subscription.