Have you ever been captivated by the ins and outs of real estate investing, declaring, “I could do that,” or even, “I want to do that,” but couldn’t pinpoint where to start? If so, you’re in luck because this Redfin article is tailor-made just for you.
Buying your first investment property has the potential to be an exhilarating and profitable adventure. However, let’s face it: The complex landscape of real estate investing can be intimidating without the right knowledge and guidance. But fear not. In this all-encompassing guide, we will unveil a treasure trove of expert tips and invaluable insights that will empower you to fearlessly navigate the process. From relationship-building to conducting due diligence, you’ll be equipped with the knowledge and strategies to enter the world of real estate investing and buy your first investment property with ease. Let’s get started!
When it comes to real estate investing, there’s no better way to learn than from those already doing it. Learning from experienced investors can vastly build your understanding of how it works, beginning with market research and ending with either the sale or signing a tenant in your new rental. You can even learn from other investor professionals by identifying if there is a way you can help them.
“I hear many new investors say that they don’t feel they have anything to offer, but that is untrue,” says Kathie Russell, a board member of the North Carolina Real Estate Investors Association . “Everyone has something to offer. I guarantee that something you do in your day job or as a hobby will be helpful to somebody.” She adds that to begin building your relationships with investors is to find your local REIA. “These groups are an absolute must for new or aspiring investors. There you will meet your lenders, your mentors, your friends, and your advisors.”
Subhadip Chakraborty with Fast Cash My Home shares that it is “crucial to dedicate time to research.” They add how your research should encompass “understanding the process and expenses involved in purchasing the property, including closing costs and other financing fees, expenses for repairs, extra monthly payments for utilities, property taxes, insurance, and the potential market value of the property after renovations.”
The learning curve isn’t overnight, therefore you’ll want to manage your expectations. Leigh Ballen with Chicago Hard Money and Bridge Loans states that you should “expect to do several [home flips] before you learn all that much or make money.” Don’t be discouraged by the curve, instead, Leigh shares how each flip is an opportunity to “to do these well” and adds how “it doesn’t come from doing one.”
Building a reliable team of professionals who specialize in real estate investment can provide invaluable guidance and support throughout the process. Max Boyko with Optimus Capital shares how there are “three pillars to a successful venture.” Those three pillars are all individuals who will be a part of your team: “a strong real estate agent, an experienced contractor, and an investment specialized lender.”
Eric Feldman, SVP of Sales and Marketing at Longhorn Investments stresses the importance of knowing who your decision makers are regarding your investment strategy and process. Within the world of real estate investing, everyone is trying to secure the best deal, thus meaning properties move quickly – so having a team of trusted individuals in place is essential.
You should identify a knowledgeable real estate agent who understands the local market and can help you identify promising investment opportunities. Additionally, having a competent real estate attorney can ensure that your legal interests are protected during negotiations and contract signings. An appraiser will help identify the actual value of a property, which can help you avoid overpaying. Collaborating with an experienced property inspector can help identify potential issues and prevent costly surprises down the line. Lastly, establishing relationships with reputable contractors and property managers can streamline property renovations and day-to-day operations.
Managing your projects is crucial on different levels. To do that effectively you’ll want to be sure you have all the right tools in place.
Don Costa with Forefront CRM calls having an “effective CRM tool the “key to success.” He shares how your CRM can “help you manage leads” in addition to “creating tasks, automating your follow-up, generating end-of-day reports, and accessing on-screen comps and property information in one tool.” Tools such as a CRM can also help you manage your conversion rates. Brian Rudderow with HBR Colorado refers to this rate as a “key performance indicator of how many deals it takes to get one closed” and adds how when you are “first starting off…expect 30 leads to close one deal.” Brian adds how “that number should be tracked and monitored until it is optimized to around 1–15 leads per deal.”
When it comes to real estate investing, Doug Van Soest, founder of SoCal Home Buyers , wisely emphasizes the potential risks involved in buying an investment property. However, these risks can be mitigated by leveraging available data. Van Soest suggests conducting a thorough comparative market analysis (CMA) using the wealth of data at your disposal to understand the current state of the marketplace. Shane Dulgeroff, president and broker for Shane Homes in Los Angeles , says to “be bullish” and “cautious if you are looking for a quick flip.” He adds how the market can shift quickly; therefore, be certain to examine factors such as property prices, rental rates, vacancy rates, and historical trends, so you can make informed decisions and alleviate some of the risks associated with real estate investments.
Buying your first investment property doesn’t necessarily mean it will be where you reside. When considering where to purchase, you’ll want to think about a location’s potential and the possible long-term equity gains associated with the area. Bri Steel, broker and owner of Live Love Santa Cruz , recommends studying an area for “desirable characteristics” such as “whether it’s close to the ocean, a lake or park, and the school district.”
Ace Woods, real estate agent and founder of Revest Homes shares not to “be afraid to branch out geographically; look for a state or area that has an affordable entry point, while still offering solid capitalization rates and appreciation.” Ace cautions that your “capitalization should be higher than your interest rates, or else you may find yourself upside down.”
Shona Lepis with Shona Buys Houses shares how “crunching numbers is crucial and you have to buy at the right price from the beginning to make sure there’s a profit.” She adds how it can be “easy to get swept up in the excitement of finding a deal, but if it doesn’t pencil, it’s simply not worth it.” One of your financial projections should be determining your after repair value (ARV). Shona states that the ARV should be “conservative” and the scope of your rehab budget should be “realistic”.
Scott Jones, the economic development director for the city of Manor, Texas, proudly showcases his community as a shining example of a location’s potential. “Manor either has or is working to have it all as we speak,” says Jones. “Manor is only minutes away from everything Central Texas offers. This includes abundant, relatively inexpensive land for development, a high-quality education system, first-class public safety and utilities, mass transit to Downtown Austin, and much more.”
Manor, Texas, has seen significant housing growth year over year. In May 2020, the median sales price was $234,000; as of May 2023, the median sales price equals $350,000 (nearly a 50% increase YOY). Consulting with local experts and real estate agents can help identify up-and-coming areas that can play a pivotal role in creating high ROI opportunities.
When buying your first investment property, it’s essential to explore the available loan options. Understanding and comparing mortgages, government-backed loans, and private financing can greatly impact your financial success. Research and consult experts to make an informed decision that aligns with your investment goals and long-term stability.
HomeAbroad, a service for connecting buyers to lenders , has a tip about Debt-Service Coverage Ratio (DSCR) loans. “While conventional loans may require income and debt to income, DSCR loans evaluate the property’s income potential and cash flow to determine loan eligibility. DSCR loans do not consider investors’ income, making them ideal for investors seeking cash flow-driven investments.”
Joshua Holt, the founder of Big Law Investors , urges real estate investors to understand the importance of conducting comprehensive legal due diligence before purchasing a property. Holt expands on this by saying, “check the title deeds to ensure there are no hidden encumbrances or disputes, review zoning laws and local ordinances to ensure that the property can be used as intended, and double check that all taxes are clear.”
“The last thing you want is to find out that local laws prevent short-term lease arrangements after you’ve purchased the property for that specific purpose,” says Holt. “Conducting legal due diligence before purchasing the property is important to ensure you protect your investment and avoid costly legal issues later on.”
A home inspection is pivotal in identifying potential flaws within a property. Home inspections can also help determine an investor’s renovation budget and help alleviate newfound stressors throughout the rehab process.
Ronnie Jackson, general contractor of Austin Home Renovations , urges buyers to “never purchase a property without an inspection provided by a licensed real estate inspector.” Additionally, Jackson adds that you shouldn’t “complete your option period without having that inspection evaluated by a professional contractor.”
Yes, taxes are a significant component of real estate investing. First, there are property taxes. Tony Trahan, a property tax consultant of KE Andrews , shares that “when buying a real estate investment property, one of the most critical factors during your due diligence or underwriting process is correctly modeling the property taxes owed going forward. In many states, this valuation determines your taxes and is highly negotiated.”
Capital gains tax is another tax to consider (and budget for), especially if you intend to sell your investment property. There are two forms of capital gains taxes, short-term and long-term. Short-term capital gains tax refers to the tax paid on profits from the sale of assets that have been held for one year or less. It is generally subject to ordinary income tax rates, which vary depending on an individual’s tax bracket. On the other hand, long-term capital gains tax applies to profits from the sale of assets held for more than one year. Long-term capital gains tax rates are typically lower than ordinary income tax rates, offering potential tax advantages for investors who hold their assets for an extended period. The specific long-term capital gains tax rates depend on the individual’s income level and the type of asset being sold.
When making an offer on your first investment property, you should be prepared to act swiftly and present a strong offer with attractive terms, such as a pre-approval letter, a substantial earnest money deposit, and flexibility on closing timelines. While it’s important to be competitive, it’s equally crucial to ensure that your offer aligns with your financial goals and allows for a profitable investment.
Whether you’re in the rehabilitation stage of your home flip or are holding a property as a rental, you’ll want to be sure you’re adequately insured. Comprehensive property insurance should protect the structure, renovations, and fixtures, guarding against perils like fire, theft, and natural disasters. Liability insurance is crucial to cover potential lawsuits or claims by others for injuries or property damage. Builder’s risk insurance can safeguard against losses during construction or renovation, while rental property insurance is specifically designed for landlords, covering structures, liability, and rental income loss.
Pegram Insurance Agency elaborates on landlord policies, “which can help protect you financially in case of damage to your property or liability claims.” Understanding which coverage works best for your situation is critical; Pegram Insurance Agency adds that “there’s a big difference between renting to long-term tenants and renting on Airbnb/VRBO. Airbnb and short-term rentals require specific endorsements for additional coverage, so check with your insurance provider.”
If your investment strategy includes renting your property, Jordan Davey, digital marketing director of Victory Property Management , offers insights from mitigating rental risks to maximizing received applications. Davey highlights performing screenings on all applicants, reminding landlords to “not take rental applications for face value. Get income verification and be on the lookout for anything that may appear suspicious.”
Additionally, Davey recommends working with your real estate agent to price the property accurately. It’s important not to overprice a rental home, but equally important to not underprice. Do your due diligence and review accurate CMA data to determine a price best suited to your market’s demands.
In conclusion, purchasing your first investment property can be an exciting and potentially lucrative endeavor. Jeremy Bourgeois with Scout Peak Home Buyers highlights the importance of understanding and performing your “due diligence” which encompasses understanding your local market, property values, and assessing necessary repairs and renovations.” By considering these key factors you can set yourself up for success. Remember to approach the process with careful planning, a long-term perspective, and a willingness to adapt as needed. So, take the leap, embrace the opportunities, and embark on your journey as a real estate investor.
If you are represented by an agent, this is not a solicitation of your business. This article is for informational purposes only, and is not a substitute for professional advice from a medical provider, licensed attorney, financial advisor, or tax professional. Consumers should independently verify any agency or service mentioned will meet their needs. Learn more about our Editorial Guidelines here.
Marcello Kline is a content marketer for Redfin. With over a year of experience writing for Redfin and a background as a former real estate agent and home flipper, he brings valuable insights to the real estate community. Based in Los Angeles, Marcello enjoys the serene beaches of Malibu, playing tennis, and hiking on a moody overcast day. His ideal home is a Regency house in London, reflecting his appreciation for classic architecture and design.
