Part of becoming a successful real estate investor is buying an investment property that is financially promising. So, how do you master the art of finding good investments? Just follow our guide!
The thousand mile journey begins with the first step. Yup, that is buying the property you are going to invest in. However, for many, it is challenging. The first thing that comes to mind is your lack of knowledge and experience. But, believe us, you won’t need it much. What’s more important, it doesn’t have to be that hard at all.
We, on Mashvisor, put together this guide in the simplest way possible. Frankly, we are aiming for it to be suitable for beginner real estate investors in the first place. As beginners are the ones who are usually stuck on the actual work, we thought it would only make sense to create this guide on buying an investment property in a step by step form. So, here is what you’ve got to do:
#1: Set your goals straight
Every successful business starts with proper planning. Therefore, start by putting ink onto paper, outlining what you plan to achieve.
First, start by painting the bigger picture. What do you want in 10 or maybe 15 years from now? Long-term goals will be great for keeping you focused and serve as a motivation for you to achieve these goals. After you are done with the bigger picture, start by creating micro milestones that will eventually help you achieve your ultimate goal. Finally, and most importantly, stick to the plan!
#2: The financial means for buying an investment property
The major concern for beginner investors is financing the purchase of investment property. Truth is, financing is the reason why many get discouraged and do not continue with their plans. As you already know, beginners usually do not have the financial means for buying an investment property. Even though it is possible to save a certain amount of money, let’s face it, saving up $15,000 is not enough money to buy an investment property. However, it could be a sufficient amount for a mortgage down payment. The thing about money lenders is that they’ll only give you around 80% of the property’s value. The rest is for you to figure out.
But, the great thing about leverage is that it plays to your advantage. Even though you get around 80% of the overall value, it means that you have an equity in that property of 20%. Besides, any appreciation in the property’s value adds up to your equity. You only owe as much as you borrowed.
Another advantage of mortgages is that lenders love real estate. This means that it is easier to finance an investment property than any other type of business. Therefore, your only obligation is to pick the right financing strategy and make sure you shop for low-interest rates.
#3: Due diligence
Here is the one thing you can’t possibly neglect: The due diligence process. When buying an investment property, your objective is to buy a profitable one. So, what do you do? Research the area, of course!
Looking into a location of interest goes far beyond a beautiful view. Actually, when analyzing a real estate market, there are certain criteria you must take into account:
- The job market and major employers in that area
- Vacancy rates and housing affordability
- The growth of population around that specific location
In short, it is important that you look up the demographics of that real estate market. There are significant indicators of vacancy and occupancy rates for all kinds of locations.
We know that you are asking yourself “why bother?” Why can’t you just buy an investment property you like?
The answer is simple: the return on investment (which is the holy grail for any investment). Needless to say, the higher the rate of return the more rewarding a property is. Thus, there is another factor that has a great impact on your rate of return besides the real estate market; it is the rental income you receive.
So, what determines your rental income?
The type of analysis that can determine your monthly rental income is the comparative market analysis. This type of analysis looks at similar investment properties within the same radius. This will help you stick to the rent range in a specific neighborhood. Also, it always helps with finding the best real estate investments as well as the best places to invest in real estate for the highest possible return.
#4: Make an offer & sign the contract
Once the seller accepts your offer, you start with the earnest money deposit. It is usually a small amount of money to express your intention of buying an investment property you want. After that comes the part where you provide all the documentation necessary including the mortgage approval letter. You then make a 20% down payment and provide all the closing costs.
#5: Buying an investment property is not all!
Buying an investment property that is profitable is not all. After you have acquired ownership over the property, it is your job to keep it profitable. The only way to make that happen is through real estate investment property management. Only by performing proper management will you be able to continue making money in real estate. Thus, if you do not have the time to do it yourself, professional property management is another option.
For real estate investors, there are other factors to succeed in real estate. Besides buying an investment property that is lucrative, there is budgeting as well. As you have noticed from previous tips, there are a few costs that are involved. This, however, requires proper budgeting.
For you, as an aspiring real estate investor, Mashvisor has put together a blog for anyone wishing to learn the ins and outs of the business. What’s even more interesting, we’ve got your back with the best real estate investment tools that will help you with buying an investment property. Make sure to subscribe and check out Mashvisor’s investment property calculator while you’re on it!