With a new year upon us, you may be looking to purchase your first investment property. Real estate investing is a terrific opportunity to diversify your portfolio while maintaining an appreciating asset. Buying a home is traditionally a daunting task but buying an investment property doesn’t have to be so intimidating. Here’s a quick guide to becoming a real estate investor. By the way, if you’re considering a property in an area that you are not as familiar with, be sure to check out ways to identify investment properties.
As with any large financial investment, the first step is to know your numbers. A thorough evaluation of your current finances and debts is needed. You’ll want to make sure your current liabilities are controlled before taking on more. You’ll also need to know the exact amount of cash needed to make your purchase. Down payment, closing costs, inspection fees, and any other upfront expenses. Creating a budget for potential costs down the road is also important.
The next big item to be considered is are you looking to invest to rent OR invest to flip? If you are looking to buy a house to rent, you will have a drastically different set of criteria in your home search than those looking to flip. Most folks like the idea of a fixer upper but if you are buying your first investment property you may want a house that’s ready for tenants. All investment properties will require some sweat equity so carefully evaluating your own skill set may help direct your decision to rent or flip. Something else to think about is if you are subbing out a majority of the repairs/renovations, your costs can quickly get out of hand.
Calculating what your financial needs are within the next five years will also help determine which route to go as an investor in real estate. In most cases, money applied to a home purchase is extremely liquidable. If you want to get your money back out of a property within a short time frame (less than 5 years), then you may want to consider a flip. If you’re looking for the long term payout of equity plus monthly income, then you may want to consider a rental property. This rule is an absolute but when applied generally, you can make your first decision accordingly. If you begin to purchase multiple investment properties your goals may change as well with each individual purchase.
Another important tip when buying an investment property is to not buy emotionally. Stick to the numbers that you know will work for you. Investors know when to pull the trigger quickly and when to walk away. This discipline comes from being a calculative decision maker and not letting your emotions get away from you. It’s certainly acceptable to love one of the properties that you are considering purchasing but you’ll want to rely on facts and logic when it comes to negotiating and/or purchasing.
The last big tip for buying an investment property is to be sure to include the appropriate professional advice. You can certainly browse homes for sale online yourself to see what’s out on the market. However, a real estate professional may be able to find properties that are not listed. They can also speak to the latest market trends, research recent home closings, evaluate potential rental costs, and navigate you through the other complexities that may arise throughout a transaction, in addition to other things that a realtor can do for you. Some other professionals to get advice from would be contractors, loan officers, and financial advisors.
Perhaps this is your year to take a plunge into real estate investing! It’s an amazing way to put your money into an appreciating asset. As you begin to explore this opportunity be sure to evaluate whether you want (and are capable) to do a quick flip or manage a rental. Once you know what direction you might go, calculate money needed, existing debt, and other financial plans in the next five years or so. When you are ready to purchase, remember not to buy emotionally and to seek advice from professionals within their respective fields. You can always find more tips on buying a home at our blog.