Buying your first investment property can be a scary thing, and rightly so. When tens of thousands of dollars are on the line, it’s imperitive that you fully understand the investment you are about to purchase. This article is designed to be a step by step guide to buying your first investment property, to help you minimize the potential problems and the fear that can accompany those potential problems. Let’s get on to the guide!
Step One: Do Your Homework
Before you even think about pulling out your checkbook, it’s important that you first spend a good amount of time researching. While you don’t need to spend tens of thousands of dollars on some late-night tv product, you at least need to spend some time reading through numerous books, blogs, real estate forums, and speaking with current investors to determine exactly what you are looking for. Without building a strong foundation at the start, you are bound to create some major problems down the road, so do your homework!
For a list of my favorite real estate books, check out BiggerPockets Presents: The 21 Best Real Estate Books Ever.
Step Two: Set Your Criteria
After reading everything you can about real estate, it’s time to nail down exactly what you’ll be shopping for. Will you be looking for a single family home or a duplex? A Walgreens building or a nuclear power plant? These are important questions to decide on, which is why step two is to define your criteria. This means actually getting out a piece of paper and pen – and writing down exactly what you are looking for. Important questions to answer for yourself include:
- How much do you want to spend?
- How much cash flow do you need?
- What neighborhoods will you look in?
- What property type will you be buying?
- What condition do you want to buy in?
- Who will manage your property?
- and many more.
These questions will make the shopping process much easier, so don’t skip step two! However, once you are finished, you may be tempted to go out and start shopping. However, first it’s important to know how you’ll pay for your investment.
Step Three: Figure Out Your Financing
I include this step before shopping because without understanding how you plan to afford the purchase, you may be wasting a lot of time pursuing properties that you won’t be able to afford. When buying investment properties, there are two basic ways to buy the property:
- Cash – You have the money in your bank account or under your mattress
- Leverage – You need to borrow from a bank, hard money lender, or other lending institution.
If you are choosing to use leverage, decide how much cash you can come up with for a down payment. If you have no money, consider partnering with someone who has cash available, such as a family member or a friend.
Open up a dialog between your local lending institutions and get pre-approved for your loan. This way, you’ll know exactly what you can start shopping for.
Step Four: Begin Shopping
At this point, you’ve done your homework, defined your criteria, and have your financing lined up — it’s time to go shopping!
The best way to start looking for an investment property is by hiring a real estate agent. Don’t worry, the real estate agent is generally free for the buyer (their fee typically comes from the seller.) Let them know the exact criteria you created in step two, and start looking at properties.
Make sure to leave your emotions out of it. Stick to your criteria, and don’t fall into the trap of trying to buy something outside your price range because it’s so nice.
When you find a property that fits your criteria, it’s time to submit your offer.
Step Five: Make an Offer (or Lots of Offers)
Your real estate agent will submit the paperwork for you to make an offer. Let your agent know exactly what you plan to pay, and prepare to negotiate with the seller until you either both come to a mutual agreement on the price or you go your separate ways because a mutually agreed on price could not be found.
When buying an investment property, it’s important to stick to the criteria you set, so you may find that most sellers are unwilling to compromise enough on the price to be a good deal for you. So be prepared to submit offers on numerous homes, and don’t get too emotionally attached to any one property.
Step Six: Close!
After you’ve acheived mutual acceptance, and before writing the final check, you enter a phase known as "due dilliegence." During this time, you will want to have the property inspected thoroughly and will arrange to get your financing fully completed.
Depending on what state you live in, the sale closing will take place either at a title company or an attorney’s office. You will show up with a cashier’s check for the down payment amount, the lender will wire over the money needed (if you are using a loan) and the seller will sign to release their interest in the property.
Hopefully these six steps have give you the step-by-step knowledge you need to get moving toward your first investment property. Remember, however, that the first step is education, so continue to educate yourself and learn everything you can about your new real estate endeavor. Surround yourself with like-minded people who will help you along your journey and don’t ever stop learning.