Buying your first investment property can seem like a daunting task. However, starting investing in real estate can be a great way to move forward on your path to financial freedom.
Real estate investments can provide their owners with anything from a little extra cash flow to a cushion of capital or generational wealth. But, of course, it all depends on your goals, how you structure them and what you put into them.
There are a few things I would like to know when investing in my first rental property. I learned how to estimate cash flow, repair costs, and identify a product that can be sold. However, I did not know or consider how location affects growth opportunities, how to increase value through forced pricing, and how inflation affects the rental market.
Investing in real estate is not for everyone, and investing in real estate has its pros and cons.
pros
- Cash flow
- Effective use of leverage
- Appreciation
- Possible tax incentives
Minuses
- Don’t hands off
- Low liquidity
- May lose value
Before investing in rental properties, it is important to start with a good financial foundation. Buying and selling real estate involves high transaction costs. If you are in poor financial position, you may be tempted to sell your investment in a year or two. Plus, you can be forced to sell when the timing isn’t ideal for making a profit because you need money. The ability to sell when it’s perfect is why it is so important to get a reserve fund, minimize your consumer debt and get your finances in order before buying investment property.
Single-family or multi-family
When choosing an investment strategy for your first property, you will have to choose between buying a single family home (SFR) or an apartment building. While many people see buying one family as a stepping stone to creating multiple families, this is not always the case. If you want to focus on multi-family apartments, you can start with them directly.
One of the benefits of investing in single family real estate is multiple exit strategies. You can sell it to another investor with a finished lease or with a tenant. You can also sell a single-family home to a buyer who plans to use it as their primary residence. I have seen people succeed in one exciting strategy: along the way, the community tries to buy, rent for several years, renovate and sell.
Multi-family apartments are usually built from scratch. This makes them great for renting out. This can lead to lower maintenance costs, more efficient space planning and a better rent-to-value ratio.
How to choose a property
Many investment styles can work. Investing in real estate is not a one-size-fits-all process. It is imperative to determine your preferred investment model, determine which property fits that model, and find properties that meet those criteria. Let’s say you don’t intend to act with that level of intention. In this case, you will be overtaken by the market and spinning wheels in search of deals. This is called analysis paralysis.
Here are some common strategies:
Cash Flow Driven Buying and Holding – Buying properties that are ready to rent or close to rent, with an emphasis on getting good cash flow.
Valuation-Focused Buying and Holding – Buying properties that are ready to rent or close to rent, with an emphasis on being in an area with solid upside potential.
BRRRR Method – The BRRRR Method means buy, rebuild, rent, refinance, repeat. It is a way to reuse your main investment by forcing the value up and refinancing your original principal from the property. This is a great way to invest in real estate at no extra cost.
Value Added Investment – This strategy focuses on buying properties that need improvement. It is similar to the BRRRR method, but does not necessarily refinance upon completion. Instead, most value-added investors sell real estate to lock in their profits.
Several things to look for in properties are cash flow, upside potential, and stability.
Cash flow: One of the main factors of investing in real estate is getting cash flow from renting it out. Rental income is relatively stable and has little correlation with other life events that can cause financial turmoil.
Potential for Appreciation: You may have heard the term “progress path”. This refers to where investors and government agencies focus resources on development. This is also where shoppers start to live. This is often a side effect as certain neighborhoods begin to value buyers, and those buyers begin to agree that they are near the community rather than in the community itself.
A 100% bet on appreciation quickly moves from investing to speculation. However, there are some sensible strategies to try to buy for the sake of appreciation. Rising values are usually an important cause of real estate wealth accumulation.
Another option for gratitude is to embed it in yourself with forced gratitude.
Stability: This usually includes the strength of ownership. For example, areas with solid schools and are likely to retain their value often have higher property prices. Thus, the decision to quantify stability and its value is an important component of defining purchase criteria.
Real estate in an area where a tenant terminates a lease before 12 months has passed is the norm, not unheard of, and often looks better on paper. This is because you can buy with a higher rent-to-value ratio. However, this does not mean that this is the best investment for everyone.
Loans
Getting an investment property loan may differ slightly from a mortgage for your primary residence.
Eligible Loans: The mortgage loans sold to Fannie and Freddie fall into this category. These are the loans offered by most of the major banks. They usually have a low fixed interest rate and a lot of documentation requirements.
Portfolio lenders: Typically, local banks and credit unions offer loans for commercial real estate, such as rental properties, which should not be packaged and sold as a qualifying loan. Requirements usually mimic the corresponding loans, but may require less paperwork and may have a slightly different underwriting model. Usually these banks are more aggressive towards lending to certain properties.
Hard Money Loans: Hard money loans do have a place in the investing world, but are not recommended for novice investors. Some lenders specialize in high-risk loans, which investors use when buying properties that are not ready to be rented out and in need of a complete refurbishment.
Hard money lenders tend to be more aggressive with their lending criteria and look at the underlying asset as collateral rather than the borrower’s ability to service interest.
Building your team
Please do not go out and ask people if they will be part of your investing team. The relationships with the people you will be working with to invest in real estate should be more organic than these.
Acquisitions
Note, I did not say “real estate agent” here. When looking for your primary residence, your search can start and end with a real estate agent. However, when looking for investment property, there are more options to consider.
It would be best if you looked at MLS, and it is generally easiest to use your own buyer’s agent for that.
Real estate manager
When buying your first investment property, it is important to decide whether to hire or manage a property manager yourself. There are pros and cons for both sides here. In the end, it will depend on how active you want to play in the management of your investments.
You may be able to do without composure and put in minimal effort for a while. However, in the end, he will catch up with you. Having systems for tracking expenses, marketing to new tenants, maintenance and capital expenditures is critical to the long-term success of your property. Therefore, it is important to think about governance and learn to do all of this in a professional manner when deciding whether to self-govern or not.
Considering the learning curve for all aspects of self-management, you might decide that the best option is to hire a professional property management company.
Accountant
At the end of the year, you will need to file a tax return that includes financial details for your property. You will need to put together a plan to do this before taxes are paid. Will you continue to file taxes in the same way as before, or will you move to a more complete service due to the added complexity?
Owning investment property carries tax implications. However, many of these consequences can be beneficial to the investor. This is why it is advisable to have an accountant who understands real estate investment and can help you design, plan and position yourself to make the most of the tax implications of your investment.
Tracking income and expenses
To report taxes at the end of the year, you need accurate income and expense records. These property lease bookkeeping records will also come in handy for comparing the performance of the property to your forecasts and allow you to make adjustments to your investment strategy. There are many ways to track income and expenses on investment property.
I’ve seen people take the low-tech approach by simply keeping all receipts in a folder for each property for each year. Another option is to keep a log of income and expenses in Excel. Finally, the most advanced and scalable option is to use accounting software like Quickbooks to keep track of these items.
Conclusion
Real estate investment can be a great option for many. However, going from zero investment property to one is not an easy task. By methodically working on this by building the model, the team can make the process more accessible. When choosing a property, it is important to consider cash flow, the potential for value appreciation and stability. Building a team is very important. You can do it organically and you can fill some of the roles yourself, but this should include acquisitions, property management, and accounting.
This article was originally published by Wealth of Geeks.