Welcome to Self and Wealth and your journey to becoming a real estate investor! We are passionate about real estate and all of the benefits that real estate provides towards gaining financial freedom. In this article, we will provide 12 tips on buying your first investment property. You will also learn how to build a team and what else you can expect when purchasing that first investment property. Towards the end of this article, we will provide actual numbers on our first investment property.
Why You Should Buy An Investment Property
Investing in Real Estate is an incredible way to build long term wealth. Real estate investing can be a bit of a grind, but it’s a great way to increase your net worth. There are many tax advantages available to real estate investors. Financial freedom can be attained by building up a real estate portfolio.
Cash-flow hitting your account every month! Typically, your cash-flow starts out small but can be used to help purchase more properties. Reinvest all of that extra cash into other properties to fast track your way to financial freedom.
Gain wealth through principal paydown and appreciation. Appreciation is a massive bonus on top of all of the other benefits of owning real estate!
Ways To Purchase Your First Investment Property
This strategy involves buying a new primary residence every few years and turning your last home into a rental. I personally use this due to living in an expensive market. When using the nomad strategy, you are able to utilize the 3.5% down FHA or 5% down conventional financing. It’s a great way to get started but it takes time and it’s not scalable.
One of the biggest benefits of this strategy is knowing exactly what kind of shape your rental is in. This can help out immensely when trying to figure out how much to save for maintenance and capital expenditures. One of the biggest downsides is moving all of your belongings every few years. You will also need to pay extra mortgage insurance until you have 20% equity in the home. This is the same strategy that I used to purchase my first investment property.
The House Hack
I love this strategy even though I haven’t applied it yet! A house hack is when you purchase a property as your primary residence and rent out a portion of it. With a house hack, you can purchase a duplex, triplex, or quad and live in one of the units while renting out the remaining units. You can also buy a single-family home and rent out extra rooms. Utilize a mother-in-law suite or ADU, an alternative dwelling unit, as a vacation rental. There are so many options within this niche which makes it so strong.
I’ve heard of some savvy investors getting paid to live in their own property using these techniques. This is a great way to scale rapidly as you are able to save money quickly to go towards future investment properties. The downside is that you have to share your space with others. It can be tough getting a spouse or significant other on board with this strategy. Also, it can be hard to find a property manager willing to manage these properties.
Overall, I personally think is the most powerful tool for someone looking to purchase their first investment property with a smaller down payment. Like the nomadic strategy, you will have to pay mortgage insurance if you put less than 20% down which means a higher monthly payment.
Putting 20% down
This is the most traditional way to purchase an investment property. You put 20% down and finance the remaining 80% with conventional financing. I’m a fan of putting 20% down, but it can be tough to pull off on your first deal. Some lenders may require more than 20% depending on your credit. I prefer the nomad and house hack strategies over this as you can put less money down and scale a bit faster.
Not having to pay the extra mortgage insurance can boost your cash-flow.
Buying with cash
Buying with cash can give you advantages when negotiating with the seller. It also helps in competitive markets when you get into a multiple bidding situation. You can get high cash flow when purchasing with cash but you might not get the best returns on your investment and it’s harder to scale if you have to keep saving up large amounts for that next cash purchase.
There are many other strategies including seller financing, BRRRR, and using other people’s money to name a few. There is no right or wrong strategy when purchasing investment properties. Try finding the strategy that aligns best with your own goals.
Building Your Real Estate Team
You’re going to need a good real estate agent and a lender. It’s helpful to have a handyman and possibly a contractor on your team as well. You may also need a property manager if you don’t plan on self-managing your properties.
The real estate agent should be able to set up automatic searches for properties fitting your criteria. A good real estate agent is irreplaceable! These rockstar agents know what areas are in the path of progress. They are also able to get offers submitted quickly and get the deal done smoothly. Try to find an agent that is also a real estate investor or one who works primarily with real estate investors.
Your lender might be the most crucial team member. If you are financing your investment properties, you are going to have to work with a lender. Good lenders can close quickly and have a high rate of closing. Get pre-approved from your lender before you start looking at properties. Do this first so that you have an idea of what you can purchase. Look for a lender that understands your investing strategy.
A handyman is optional but will make your life much easier when poop hits the fan. In the beginning, you might take on fixing issues yourself but you will eventually want a handyman on your team.
Contractors can be necessary if you need serious repairs or you are upgrading a property. I don’t personally have a contractor on my team at this point. However, I’m looking to take on a distressed property and I will have to with a contractor to get that distressed property properly rehabbed.
I recommend that you self manage at least one property before hiring a property manager. You will have a better idea of what to expect out of a good property manager if you gain that experience. A property manager might not be needed until you become bogged down from self-managing all of your investment properties.
Wholesalers are essentially deal finders. They usually find distressed properties and get them under contract at a deep discount. They work with buy and hold investors and flippers to sell these properties. I don’t recommend purchasing your first rental from a wholesaler unless you know the ins and outs of rehabbing a property. Also, you can’t use traditional financing to acquire properties from wholesalers.
Get referrals from your trusted team members for other team members. I have a rockstar real estate agent that’s referred lenders, handymen, contractors, a plumber, and an accountant. My agent is my go-to resource whenever I need to add a new team member.
I also like keeping a list of reliable vendors that I’ve worked with.
What Else Do You Need Before Purchasing Your First Investment Property?
It’s super important to know your credit score. I’ve been using a free service called Credit Karma to track my own score. Many credit card companies offer free credit scores. The higher your credit score, the more likely you are to get financed and to get lower interest rates. If you have loads of credit card debt, put together a strategy to pay that debt down.
Begin utilizing free tools to learn more about real estate investing. I love Bigger Pockets! They have multiple podcasts, discussion boards, webinars, and calculators all related to real estate. Youtube can also be a great resource for brushing up on real estate investing. Try to find local investors that offer free webinars. Do beware of upselling at free sessions. The big-name real estate gurus will have their own programs that can be super expensive. In my opinion, I would avoid these and utilize free resources.
At this point, the only thing that I’ve paid for is a pro account on Bigger Pockets. Podcasts are great as well. I listen to podcasts whenever I’m in my car or when I’m doing small tasks that don’t require a ton of brainpower.
Figure out what market you want to invest in and your strategy/niche. Some strategies work better in certain markets. It might make sense to start by picking a market and then figuring out the best strategy within that specific market. Utilize your real estate agent to help you figure out what property types will work within your chosen market and strategy.
Go to meetups and begin networking. This is very important and something you can start doing now! Real estate investors are very passionate and love to share knowledge with like-minded individuals. Try creating a local meetup if there are none in your area. Connect with seasoned real estate investors and provide value to them in exchange for their knowledge. I use meetup.com to find meetups near me.
Block out time on your calendar weekly or daily to begin analyzing deals. This will help you get an idea of what a good deal looks like. This helps prepare you to be able to pull the trigger on a property when you have the funds available and are approved for financing. There are great videos on youtube that can help you run the numbers on a rental property.
Don’t Listen To The Naysayers!
Your friends, family, coworkers, and maybe even your dog might think you are crazy for wanting to purchase an investment property. Do not listen! Most of these people have never invested in real estate and are driven by fear. Instead, educate yourself to purchase the best property for your strategy. These are the same people that will become interested in your real estate ventures as you inch closer to financial freedom. Network with like-minded people to help set yourself up for success!
Put together a plan and minimal criteria for your tenants to pass your screening process. A good criterion is at least 620 credit score and someone that makes 3 times the rent per month. I use a resource called Rentprep to screen tenants and pass the cost on to them with an application fee. Some states might not allow you to charge the tenant for this fee so check with your lawyer or CPA before charging a tenant for an application fee. You can mitigate a lot of landlord headaches by doing proper tenant screening.
12 tips On Buying Your First Investment Property
These steps don’t have to be followed in this particular order.
- Figure out your market and strategy.
- Put together a plan on saving for a down payment if you don’t already have the money available. Do have reserves saved. You will need extra money at some point!
- Find a good realtor.
- Select a lender and get preapproved.
- Analyze deals and have your real estate agent send you properties that fit your criteria.
- Get your tenant screening process nailed down.
- Start submitting offers on properties that work for your strategy.
- Purchase your first investment property!
- Make sure it’s rent ready by fixing any issues and give it a proper cleaning.
- Get all necessary documents ready before you put your property up for rent. You will need a lease agreement, security deposit agreement, and possibly other forms/documents.
- Take good pictures and put your property up for rent. I’ve used a free service called zillow rental manager for listing my rental.
- Screen possible tenants and get your property rented out!
After you’ve done this process once, you can repeat it to build up your portfolio!
This may seem like a ton of work and with your first investment property. After you’ve done it once you can build systems to make it easier and repeatable. My wife and I were able to do this while both working full-time jobs, planning for a wedding, and moving into a new home. It was a stressful few months but it has paid off tremendously in the long run.
A Real Example Of Our First Investment Property
We initially bought this property as our primary residence. This property is in Arvada, Colorado near a popular area called Old Town Arvada. Our real estate agent pushed us to purchase this property because he saw the potential for massive appreciation within the neighborhood. That property was a little smaller than what we wanted but this home has turned into a phenomenal rental! It’s a 1420 square foot single-family home with 2 bedrooms and 2 bathrooms.
Original Purchase May 2015
Purchase Price: $272,000
Down payment and closing costs: $14,500
Loan info: 30 year FHA loan with 3.5% down at 4.25% fixed interest
Monthly payment: $1850 including mortgage, escrowed property taxes, home insurance, and mortgage insurance since we had less than 20% equity.
Refinance in December 2017
We decided to switch to a 15-year loan when we refinanced out of our mortgage insurance. This was well before we decided to turn this into a rental property. We initially thought we would live in this property for 5+ years. The crazy Colorado appreciation helped us hit that 20% in equity to get out of our mortgage insurance.
Refi amount: $266500
Loan Info: Conventional 15 year fixed at 3.75% interest
Monthly payment: $2200
Purchased new primary residence in June 2019 and turned our first home into a rental
This is where it starts to get fun! The Colorado appreciation didn’t slow down and our first home was valued at 350K. I tapped into that equity with a HELOC, a home equity line of credit, and used money from the HELOC as a down payment on our new primary residence. We did a few minor repairs ourselves and cleaned the out first property before we rented it out. We did have to hire a handyman to fix a few items that were outside of our own wheelhouse.
Our monthly payment had gone up a bit due to increases in property taxes. We did have to replace the air conditioner and pay a deductible for a new roof while we lived in our first home. That put our all-in costs at around $25k after all repairs and the costs of initially purchasing the home.
House 1 Rent plus monthly pet fees: $2450
Monthly payment: $2250
Money towards reserves and maintenance: $200
Monthly cash-flow: $0
Return on Invest: 9.28%
Notice the $0 monthly cash-flow? We didn’t take any of the extra $200 a month for ourselves. We left that money in a checking account to cover expenses as they popped up. It’s very important to build up reserves so that you don’t have to come out of pocket when maintenance issues arise.
Refinance in December 2020
We are currently refinancing our rental property to take advantage of the crazy low-interest rates. We also wanted to switch back to a 30-year loan to increase our monthly cash flow. I was able to pay off the HELOC on my first property and refinance that cost into our new loan.
Refi amount including HELOC payoff: $270500
Loan Info: Conventional 30 year fixed at 3.5% interest
Appraised value: $425k
Monthly payment: $1500
Money towards reserves and maintenance: $200
Monthly cash-flow: $750
Return on investment: 32%
As you can see, the true power in real estate shines through after you own a property for a few years. We made a personal sacrifice by collecting $0 in cash-flow for 1.5 years. Now we will be cash-flowing $750 a month due to leveraging a low-interest rate, switching back to a 30 year fixed loan, and principal paydown from the last 4 years.
We plan on using all cash-flow to build up reserves and fund the purchase of our next investment property.
I hope this article helps you on your own journey to purchasing your first investment property. Good luck and get out there and start taking action!
Hi, I’m Richard. I’m passionate about figuring out how to make my money work for me and getting outdoors into mother nature.