Before buying an investment property, a real estate investor should ask him/herself: Is this the right move for me?
Your answer to that question is determined by your real estate knowledge and education, and the actual series of questions that you, as a new investor, should be asking yourself are: Do I have sufficient real estate knowledge or experience to start investing in the real estate market? If not, am I willing to allocate some time and effort into learning about real estate investing?
If your answer to the latter question is yes, then it’s about time for you to start learning about the steps that will lead you towards buying an investment property.
Consider Your Finances
The first step towards buying an investment property is figuring out your finances.
At this early stage of planning your purchase, you will need to ask yourself these questions:
- Do I have enough money saved for buying an investment property?
- If so, what’s the amount of money that I have? And what kind of property can I buy with it?
- If not, how much money will I need to save in order to buy an investment property?
- Will I need to apply for a mortgage in order to finance buying an investment property?
- What’s the amount that I will be covering with the mortgage and what’s the down payment that I can afford to make from my own savings?
Your finances will be the major factor affecting your buying an investment property; they will determine the size of your investment, and they will eliminate any choices that are beyond your financial capabilities, making your search for an investment property much easier.
Additionally, your finances will determine the quality of your investment, and your entire calculations, plans, and investment strategy should be based on them.
Plan Your Investment Strategy
Once you have your finances figured out, you need to ask yourself the following questions:
- What am I buying an investment property for? Is it for pure profit, or do I intend to use it as a primary residence?
- If my goal is to make a profit, how fast do I want to make that profit? Do I want to aim for long-term value? Or do I want to cash out my investment at the soonest opportunity?
If your answer to the first question is that you’re intending to live in the property that you’re buying, it will make acquiring a mortgage for your purchase much easier, as mortgages for primary residences are easier to get.
Whether you intend on buying an investment property that you will live in or not, there are two primary options for you to make a profit from your investment, and they will both determine the speed at which you will make money from your investment.
If you’re looking to make a profit in the short term, then you should consider investment strategies that revolve around increasing the property’s value in a short amount of time and selling the property for a margin of profit.
If you intend on holding the property as a long-term investment, then either you should consider holding it and waiting for appreciation to happen, increasing the property’s value passively over time, while renting it out and earning a profit through rents (you can rent out only part of the property if you’re living in it), or you can combine the two factors for a larger profit.
Choose Your Property Type
Based on your investment strategy and your financing, it’s time to decide on the type of investment property that you intend to buy.
There are a number of real estate properties that you can choose from, and each type works better with certain investment methods than others, as well as in certain locations better than in others. These types are:
- Residential: Single-family homes, multi-family homes, small apartment buildings, condos, studios, and any other real estate properties that are used primarily as small-scale residences.
- Commercial: Large apartment buildings, offices, and other real estate properties that are used for business purposes, and that are invested in mainly for a profit.
There are also other types of real estate properties, such as industrial real estate, that are larger in scale and should be avoided by beginner investors.
Choose Your Location
Choosing a location for buying an investment property is a major decision for your investment. The location of the property will determine the median prices of properties, their quality, their appreciation potential, and how they compete in the market.
Having sufficient knowledge of the area that you’re investing in is key to planning your investment. Real estate is a market that revolves around locations. What might be a great investment in one area could be a complete failure in a different area.
The location of your property will also affect your investment strategy as well as your involvement with the property. You won’t, for example, be able to manage your rental property if it’s in a different state from where you live, which means you will have to hire professional property management, adding an extra expense to your investment.
Property Comps and Analytics
After deciding on a location and property type, it’s time to start analyzing your options. Before buying an investment property, you want to make sure that it is the best option available to you based on your finances and investment strategy. In order to do that, you will need to compare a number of similar properties in the area in terms of their median price, occupancy rate, cash on cash return, cash flow, appreciation potential, age, etc.
You can use Mashvisor’s property finder in order to do that. The property finder will allow you to view the available properties in your area of choice based on your search criteria, providing you with qualitative and quantitative data on these properties.
This, combined with the investment property calculator, allows you to determine the best options available to you and the expected profitability of each of these options. After comparing a number of different investment properties, all you have to do is to decide on the optimal one for your investment.
At this point of buying an investment property, you should have acquired more knowledge and hired professionals to assist you in your decision-making. Make sure to always consult legal and financial experts to ensure that your investment will go as planned, and hiring a real estate agent will provide you with the support that you need throughout your investment.
Your first step starts now: start researching, reading, and educating yourself on all the steps mentioned above. Make sure to read more blogs and guides, which you can find on Mashvisor as well as a number of other sources found online, as there is much more to each step than what can be included in a single blog.