Are you ready to start building your real estate investment?
The road to wealth is paved with real estate. At least that seems to be the consensus among millionaires since 90% of them (according to billionaire Andrew Carnegie) invest in real estate.
Real estate has the potential for big returns, but as with any investment you could also lose a lot of money. Be sure to do your homework first and get the right expert help to set yourself up for success.
To help with that homework, check out these three invaluable steps to buying your first investment property.
1. Pick a Location
The first rule in real estate will always be, location, location, location! This is especially true when choosing your investment property. You can get a killer deal on a property but if no one wants to live there, it won’t be worth much as an investment.
Scout the area well where you are considering buying. Better yet, buy in your own neighborhood. If you are interested in residential properties, you’ll need to think like someone who would want to live there anyway.
Are there convenient amenities nearby? A strong local economy, i.e. good jobs? Fun attractions? Low property taxes?
If the neighborhood is hopping with lively nightlife and hip hangouts you may want to focus on one-bedroom units that appeal to singles and young couples. If the area can boast an excellent school system and lots of parks and fun activities for children, consider larger units. Families will be looking for multi-bedroom units.
2. Determine What Kind of Properties You’re Interested In
Once you know where you want to invest, you need to decide the type of properties you want to buy. Residential real estate is a (relatively) secure investment. People will always need a place to live and the number of those who rent rather than buy has more than doubled in the U.S. since 1965.
However, renting out single-family homes can be a challenge. They tend to require more maintenance because they tend to have yards. Plus, you’ll only be making money if that one tenant’s payments are enough to cover all your expenses (mortgage, taxes, insurance, etc.) Finally, it has to be occupied at all times or you’ll be losing money.
Condos are a bit better in that the HOA handles part of the maintenance, you’ll only be responsible for the interior of the unit. However, you have to factor the HOA fees into your budget.
Multi-family properties help you diversify a little more. It tends to be easier to collect enough rent to cover your expenses. Plus, unless there is a mass migration, it’s unlikely your property will be left completely empty.
Commercial real estate has a huge potential for returns. Renting to businesses is more profitable than renting to residents and the contracts tend to be longer/more stable. However, it also requires more money to get started and there is a higher risk. Consider investing with a partner if you go this route.
HGTV has romanticized the idea of fixing and flipping houses and many people are lured by the promise of huge returns. However, unless you have some solid real estate and home improvement experience, this route is fraught with pitfalls.
The work is time-consuming and will require hours of your attention and sweat equity. Mistakes can cost thousands of dollars and a huge loss is perhaps just as likely as a huge payoff at the end. We don’t recommend this type of investment for the beginning real estate investor.
3. Find an Agent
A key to your success as a real estate investor will be to team up with the right people from the start. Perhaps the most important step in the process is choosing the right investment property. A knowledgeable real estate agent is a crucial resource to help with that.
Choose an agent with considerable experience in the market you want to enter. They should have their finger on the pulse of the area and know what type of investment will do well. Ideally, you want to hire one with extensive experience in purchasing investment properties.
Speed is often of the essence in real estate deals, especially of this type. A motivated agent that has the resources and know-how to sniff out the best deals before they come on the market will be a huge asset.
Ready to Buy Your First Investment Property?
Remember, you won’t get rich overnight. Real estate is a long-term investment. You’ll only see those big returns if you invest wisely and are patient.
Educate yourself well before buying your first investment property and be prepared to learn a whole lot more, including investment vehicles like the 1031 Exchange. If you do things right, in a few years you’ll be looking back and thanking yourself for your efforts.
Ben Mizes is the co-founder and CEO at Clever Real Estate, a real estate marketing firm that connects home buyers and sellers with top-rated agents at a discounted rate.