Are you ready to become a real estate investor?
If yes, welcome aboard! It has become a known fact that real estate investing is a great way to make money and generate a positive cash flow. However, the line that separates you from becoming a successful real estate investor from an unsuccessful one is your ability to buy your first investment property correctly. Buying that first investment property will be the most vital decision you will ever have to make and it can determine whether you will climb mountains in real estate investing or sink deep into an ocean. I certainly don’t want anyone sinking! This is why I prepared this blog to tell you what to do and what not to do when buying your first investment property.
Related: Are You Ready for Buying Your First Investment Property?
DON’T: Buy your first investment property without having some knowledge!
A commonly made mistake that many first-time homebuyers make is dive into real estate without having a clue as to what it is. Having at least the basic knowledge of real estate investing is important when buying your first investment property. Ask yourself “How much do I really know about the real estate market?”
It’s not necessary to have a degree in real estate or consult a real estate agent to gain the knowledge needed. It’s enough to explore the free sources around you. The vast growing world of technology has made it easier to educate oneself with a click of a button. The internet is packed with real estate articles, blogs, and books about every aspect and detail in real estate. Mashvisor itself has thousands of blogs about various topics that you can read to help you learn a thing or two about real estate.
DO: Conduct real estate market analysis before buying your first investment property!
To avoid falling into many hazards that no real estate investor wishes for, you MUST conduct a real estate market analysis before buying your first investment property. So if an investment property has caught your eyes, make sure you perform a real estate market analysis (also called comparative market analysis) before buying to guarantee you are making smart investment decisions.
In simple words, a real estate market analysis is a study of the current market values of properties comparable to your investment property to help determine its market value. Real estate market analysis is important for professional and new real estate investors alike because it helps them identify the estimated value of the property before they buy, sell or rent it out. Below is a very brief explanation of the three main steps for conducting a real estate market analysis.
To learn more about comparative market analysis read: How To Perform A Real Estate Market Analysis.
Step 1: You need to conduct a property analysis of your property in terms of area/neighborhood, construction age, size in square footage, amenities, recent improvements and many other characteristics.
Step 2: Find recently sold properties in your location that are comparable to yours. They should have similar features to your investment property. These are commonly known as real estate comps.
Step 3: After you choose potential investment properties, you need to compare the properties based on their prices to determine your property’s market value. The market value of your property should fall in a range in between the ceiling price and the floor price of the comparable properties you picked.
Don’t: Buy your first investment property without knowing your financing options!
Financing your first investment property can be very overwhelming. Often times for many new investors, not having the money needed to buy a property scares them off and prevents them from investing in real estate. There are many financing options that can help investors buy their first investment property. Let’s take a closer look.
This is the most common form of investment property financing and is used by the majority. Basically, real estate investors go to the bank and apply for a loan. You can also go to a mortgage broker instead of the bank. The loan requires you to put a down payment which is at least 20% of the income property’s purchase price.
Related: What You Need to Know About Investment Property Mortgage Lenders
2. Private money lenders
This type of financing option doesn’t have so many formal rules and regulations between the lender and the real estate investor because they are people you know. Whether it’s a family member, relative, close friend or co-worker, private money lenders are not that complicated. Plus, they don’t have strict conditions like a mortgage would and the length of the loan is flexible due to the personal relationship between you and the lender.
3. Hard money lenders
Hard money lenders are specifically for real estate investing. They are loans taken from professional individuals or companies. Unlike private money lenders, they come with more formalities and documentation. The plus side to hard money lenders is that once you get approved, it’s only a matter of days until you get the money.
4. Real estate partnerships
From its name, you know that a partner is involved. It’s quite normal for investors who want to buy their first investment property to have trouble providing the financing alone. Having a partner is good because you can divide the profits between the both of you according to each one’s contribution. You and your partner can write up a contract to agree in terms of managing the property, funding the property, and the different responsibilities involved.
Related: What Are Your Options for Financing for Investment Properties?
Do: Know the different types of properties before buying your first investment property!
You can’t just decide on buying your first investment property without knowing the different types of investment properties out there. Not only do you need to know the different types of properties but you need to know about the different investment strategies in order to see which one is most suitable for you. Don’t panic! There is a way to simplify your search and that’s by using Mashvisor. With Mashvisor, you can find out which type of property is the best option for you and which investment strategy (Airbnb or traditional) you should choose. Just type in your desired location and begin exploring all your options easily.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Types of real estate investment properties:
- Single-family homes: Single-family homes are separate homes that typically house a single family. These types of properties are commonly found in suburban areas because the land is cheaper than in urban areas. They are easy to finance and are very high in demand, making them favorable among investors.
- Multi-family homes: These are residential properties that include at least two separate housing units. They generate high positive cash flow but are more difficult to finance because they are more expensive than single-family homes.
Related: Single Family vs. Multi Family Rentals: Which Is the Right Real Estate Investment for You?
- Townhouses: Townhouses are residential properties that are most common in urban areas. These properties are known by their small square footage area per floor on multiple floors.
- Condos: A condo is a single unit within a large complex of apartments. Usually, the market for condos consists of first-time buyers who are looking for a convenient residence with low maintenance and shared amenities.
Two main investment strategies:
1. Traditional: This type of investment strategy is used for long-term rentals and they are the most common types of real estate properties. A long-term rental is purchased with the purpose of renting it out for a long period of time.
2. Airbnb: Mainly short-term rentals are used with this investment strategy. Short-term rentals are rented out on a nightly basis for shorter periods of time starting from one night up to 6 months.
The bottom line
No matter how terrified you might be when buying your first investment property, there is always a way to make the process easier. Search, read, and familiarize yourself with all the aspects of real estate to avoid making mistakes that might cost you your rental property.