The fundamental goal of real estate investing is buying an investment property, in any of its forms. While the purchase behind various types of income properties, such as Airbnb rentals and long term rental properties, may differ, the basis of buying an investment property boils down to 8 general steps.
1. Do Your Research and Outline Your Goals
Buying rental properties is a significant endeavor for many investors. It, therefore, requires accurate and thoughtful research. Think about questions relating to your investment such as: What type of rental property do you want to purchase? How much of a return on investment would you like the income property to generate? Are Airbnb rentals and short term rental properties legal in your area? Do you want most of your profit in the form of rental income or appreciation? Be sure to clearly define what you want out of the investment property and research accordingly. The more research and thought you put into the effort, the more important questions will come to mind. You should also consider reading real estate investing sources, such as Mashvisor’s blog, that provide tips, questions, and details relevant to buying an investment property.
2. Prepare Your Finances
Once you’ve figured out what it is you’re looking for from the rental property, start preparing your finances. This step, as any other, will require further research and thought. The two main forms of real estate investing financing are mortgages and cash. Decide on which, or any other option, is more suitable for you. In the meantime, do your best to boost your credit. Also, be sure to save cash reserves for the future purchase.
3. Pick a Location
The next step in buying an investment property is finding a desirable location. This is arguably the most important step because making money in real estate strongly depends on a property’s location. Consider your own location or out-of-town or out-of-state locations. Learn as much as you can about the location and think about what will make it attractive for prospective tenants.
Conducting a real estate market analysis, or a comparative market analysis, greatly helps in this step. The real estate market analysis will use real estate comps to analyze a certain area. The rental comps are investment properties that are similar to a property that you desire. The analysis gives you an estimate and idea about how profitable a property will be in terms of rental income, cash on cash return, cap rate and more. To get yourself started with a comparative market analysis, click here to start a 7-day free trial with Mashvisor!
4. Find a Property
Once you’ve narrowed down a location, you must find a property. You can find rental properties through word-of-mouth and advertisements. The vast majority of investors, however, use the Internet when searching for properties. From there, you can use an investment property finder, such as the one from Mashvisor’s investment property calculator, to search for the best real estate investments in the area. Once you’ve located a property, you can move on to the next step of buying an investment property.
5. Perform an Investment Property Analysis
To find out if the income property you are interested in would be a good investment, you’ll need to conduct an investment property analysis. An investment property analysis, like a real estate market analysis, can be performed by Mashvisor’s rental property calculator–which also functions as an Airbnb calculator for short-term rentals. The analysis will compute various forms of data relating to the property’s profitability, such as rental income, rental expenses, financial expenses, and more. It will then estimate the projected positive cash flow and return on investment, in the forms of cash on cash return and cap rate, of the investment property.
6. Choose a Rental Strategy
Before you commit to buying an investment property, you should have a clear idea of what its optimal rental strategy is. If you use Mashvisor’s investment property calculator, this step will be a piece of cake, since the calculator itself tells and shows you the optimal rental strategy for the property. Nonetheless, you should use cues from the location to understand what type of strategy will be profitable and in demand. Traditional rentals, for instance, are most successful in residential areas. Once again, a comparative market analysis would be helpful in this endeavor.
7. Prepare for Property Management
Buying an investment property is only one part of the real estate investing equation. Maintaining the property is the other, longer-lasting aspect. For this reason, the real estate investor should prepare for investment property management in advance. This will largely depend on the rental strategy the investor opts for. Airbnb rentals and short term rental properties, for example, typically require very consistent but relatively inexpensive management. Overall, there are two general forms of property management an investor should consider before buying an investment property: self-management and professional property management. Be sure to learn about their differences, while considering your situation, when choosing one option over the other.
8. Make an Offer
Once everything, from your finances and property, is ready, contact the seller. Share the property report obtained by the bank lender with your agent and make an offer to the seller. Always make an offer you are 100% comfortable with, no matter what. If the offer goes through, you’ve just completed buying an investment property.
Buying an investment property involves 8 basic steps: planning and researching, preparing finances, scouring for locations, narrowing down investment properties, understanding the property’s profitability, picking the optimal rental strategy, preparing for property management, and making an offer to the seller. There might be slight deviations in some of the steps depending on location, but these general rules hold true. Want to take what you’ve read and put it into action? Click here to start analyzing investment properties in your desired location and start buying an investment property!