Investing in real estate (specifically income properties) has been one of the best career changers for people all around. And if you want a part of the glory, you’re going to need to start strong. To do so, check out our steps and tips for buying your first income property.
Investing in Rental Property for Beginners: Buying Your First Income Property
Of course, with any investment comes a lot of work and research. Buying an investment property isn’t as easy as following a list and checking off steps. However, building your knowledge on the process can really go a long way when trying to really get the best investment deal. This doesn’t only apply to the first-time real estate investor; even experienced investors continue to research and learn more about the industry.
Now when it comes to your first real estate investment, there are definitely some basic dos and don’ts you should know. Those are entailed in the following steps. Here’s the right way on how to become a real estate investor.
Step #1: Understand the Industry
Before you can even start searching for the right income property, you need to know what that actually is. Buying your first income property will be a lot easier when you know what to look for. You can build a strong background on the real estate investing industry by simply reading about it or talking to people.
Networking and building reliable relationships with other people who’ve already positioned themselves in the business is a good way to start. Building off their personal experience can help you decide what’s right for you.
If you don’t know anyone in the industry, no worries. Experts in the field have been sharing their investing methods for years- through books.
Related: 10 Best Real Estate Investment Books to Read in 2018
Step #2: Figure Out Your Income Property Financing
Determining your financial position before searching for a property and choosing one will help you filter out your options. You don’t want to get your hopes up for a certain property only to later discover it’s out of your budget. This is true whether you’re paying in cash or getting a loan. You should contact a lender to find out the loan and interest rate you’ll qualify for. This way you’ll know what kind of loan payments to expect.
Establishing your “borrowing position” is good to do before buying a rental property. By getting your financial matters in order at the beginning, you can find the right income property for sale within your budget so that you can make your monthly loan payments on time.
Step #3: Find the Right Location with the Right Tenants
This is an important step you might overlook when buying your first income property. Because this rental property is going to need to be occupied to turn over a profit, you want to choose it wisely. What is your target tenant demographic? Are you going for young professionals? Or were you thinking more the retirees’ path? Whatever it may be, knowing your renter pool in the market you invest in will allow you to actually attract these renters to your property.
This, of course, follows finding the right location. The right neighborhood will hold a profitable rental property. Look for key profitable indicators such as low property taxes, low vacancy rates, strong economic growth, etc.. By understanding the area you’re buying your first income property in, you can choose the right property.
Related: Finding Income Properties Using a Heatmap
Step #4: Determine Your Returns and Expenses
Beginner real estate investors are encouraged to analyze multiple deals before narrowing in on one. You want to keep your options open; start from a list of 30-50 and work your way down to the most attractive listing.
Now if you’re buying your first income property, you don’t really have previous experience on how to determine the value of a property investment. If you’ve set your efforts on one certain property, you want to learn everything you can about it. This is done by conducting a thorough investment property analysis.
Related: The Beginner’s Guide to Rental Property Analysis
The first part is estimating your rental income. How much income will this property generate every month? Compare the rental property’s previous rental rates (by asking the previous owner) to other similar properties in the area. This method is part of a comparative market analysis. Comparing the rental income of rental comps will help you set your own rental rate.
Then comes the expenses. It’s important for investors to not just look at the rental income of a property, but also the expenses associated with it. If not managed well, major expenses can really cut into your profit margins. Some of the main expenses to include in your analysis are repairs, maintenance and utilities, any renovation/remodeling expenses, vacancy, taxes and insurance, and HOA fees.
Step #5: Calculate Your Cash on Cash Return Rate and Cap Rate
These are two of the most important calculations to be made when buying your first income property. The cash on cash return is the percent of cash you’ll be making back on the cash you put into the property. So here we’re only talking about the amount of money you personally invested in this property, excluding the amount loaned. A good cash on cash return differs based on the property and market, but anything above 10% is typically considered acceptable.
The cap rate is similar to cash on cash return, but here we’re including the full cost of purchasing the investment. This is an indicator of how long it’ll take you to earn your money back on the investment. So, in this case, you’ll want the highest cap rate possible.
These calculations can prove to be quite tedious for investors, especially if you’re one buying your first income property. To ensure the most accurate calculations, consider using a rental income property calculator. This is a digital tool that will make all the complexities involved in buying your first income property go away. And you can start using one today! Just start your 14-day free trial with Mashvisor now.
The Bottom Line
Investing in real estate is a long-term commitment. So you’re going to want to complete due-diligence when buying your first income property. After doing all the steps mentioned above, you can evaluate the worth of this investment and be more confident in your choices.
Related: 5 Tips on Researching Investment Properties
Don’t forget to utilize the most reliable and accurate resource available- Mashvisor. To learn more about how we will help you make faster and smarter real estate investment decisions, click here.
