If you are a first-time investor in the real-estate market, securing an investment property can be a daunting task, especially for those who have grown accustomed to apartment living. To turn a profit, you’ll need to side-step many traps that can quickly put a damper on your dreams. You’ll need to think long and hard and do plenty of research on the market before you make a move—so we’re here to help you with a few tips to get started.
1. Make a List
Think about your dream criteria—even if you can’t match it, it’ll give you a place to start. Think about the type of town and neighborhood, and then think about property specifics such as lot size, property size, property condition, cap rate, and cash flow. Property taxes, crime rates, and natural disasters all will play a role in your final costs and insurances, so be sure to measure every expense.
2. Getting Started
First, you’ll need to contact a lender to find out what loan rates you’ll qualify for. By doing this before you select a property, you can be better prepared.
Once you’re ready to enter the field, think about purchasing and living in a duplex with a tenant on the other end. This keeps you close for repairs, lowers your mortgage rates, and allows you to rent out the other half once you’ve moved on.
3. The Property
It can be tempting and often beneficial to buy a property that requires a lot of work, but for your first rental property, keep it to cosmetics. Electrical and plumbing work can quickly add up and wipe out your long-term profits, and they are rarely DIY projects. Painting, refinishing floors, putting in new carpets, and adding new hardware and fixtures are great ways to increase value without breaking the bank.
Many investors use the 70% rule. This rule applies to the value of a home after repair and what you should pay prior. For example, if a home should be valued at $100,000, but needs $20,000 of work, the most you should pay is 70% of $100,000 ($70,000) minus the cost of the work ($20,000) for a price tag of $50,000.
4. Making an Offer
The process of buying an investment property is often lengthy and difficult. Many parties are involved, including an agent, a title company, and an attorney. Make sure you know how much in repairs you’ll need to make before this point, as you should be lining up contractors or buying supplies to DIY.