If you’ve ever had a landlord, you probably haven’t dreamt of becoming one. Dealing with calls about oversized bugs and overflowing toilets doesn’t exactly scream glamour. However, when done correctly, real estate investments can prove highly profitable.
Even in our current climate of higher interest rates, it remains a viable option. Moreover, real estate investment can effectively diversify your existing portfolio and, over time, generate a passive income stream. The best part is that many top-notch real estate investments won’t require your constant attention to tenant demands.
Real estate presents a plethora of benefits, but it can also carry potential risks, especially for those new to real estate investing. At BB Constructions we are committed to ensuring that your inaugural Real Estate investments experience is both rewarding and lucrative.
How to Plan Ahead Before Your Real Estate Investment
Before you decide buying property make sure you’re financially and mentally ready. Whether you want to be hands-on or hands-off in real estate, plan to fix and flip, or own rental properties from afar, keep these important things in mind:
Potential Risks
Overestimating Fair Market Rent Leading to Negative Cash Flow
To prevent investing in a property that loses money, you can utilize a simple rental property analysis spreadsheet, such as the one linked here. This tool helps you assess the potential financial performance of the property.
Unexpected Major Repair Bills
When you purchase a property from a private seller or the MLS, you run the risk of encountering substantial and costly repairs. Issues like air conditioning or furnace breakdowns or major plumbing repairs may require expensive licensed contractors.
To avoid surprises, establish a capital reserve account for emergency repairs or consider purchasing a turnkey investment property that’s been thoroughly inspected and is already occupied by a reliable tenant.
Vacancy Rate Exceeding Expectations
In some cases, due to local market conditions, finding a qualified tenant may take longer than anticipated. During this time, expenses like landscaping, property taxes, and the mortgage still need to be covered.
When creating a pro forma financial statement for your first investment property, stress test it by experimenting with different vacancy rates. This will provide you with a clearer understanding of how much cash you should have in reserve if the property remains vacant for an extended period.
Planning Ahead
Prioritize Your Personal Finances
Some real estate investment companies invest everything they have into their first property, borrowing from friends and family, and leaving no room for personal emergency funds. While TV real estate gurus may encourage this approach, life’s unexpected challenges could force you to sell your rental property at an inopportune time.
So, consider your personal needs by maintaining 6-12 months of savings and contributing to an IRA or 401(k). This not only provides tax-deferred savings but also allows you to set up a self-directed IRA for real estate investments, enabling you to build a tax-sheltered investment property portfolio.
Strengthen Your Credit Score:
Most lenders require a credit score of at least 740 to provide you with the best mortgage rates and terms for a residential investment property. Pay down high credit card balances and address any negative marks on your credit report before applying for a loan and making an offer on a rental property.
Build Business Cash Reserves
When purchasing your first investment property, you’ll need funds for the down payment, escrow fees, legal fees, closing costs, and potential repair or renovation expenses if it’s not a turnkey property. Some lenders may also require you to maintain six months or more of cash reserves, ensuring you can cover the mortgage in case of unexpected vacancy.
10 Steps for Buying Your First Investment Property
Determine Your Desire to Be a Landlord
Managing an investment property can be time-consuming and expensive. Many successful investors hire professional property managers. If being a landlord isn’t your preference, consider indirect real estate investment through joint ventures, crowdfunding, or REITs.
Eliminate High-Interest Personal Debt
High-interest personal debts, such as credit cards, medical bills, and auto loans, can drain your cash flow. Prioritize paying down such debts to ensure you can meet financial obligations related to your investment property.
Save for Your Down Payment
Investment properties often require larger down payments. A substantial down payment not only secures better interest rates and terms but also results in lower mortgage payments, providing greater cash flow.
Accumulate Cash Reserves
In addition to your down payment and closing costs, maintain cash reserves for unexpected repairs or reduced rental income due to vacancies. You can build this reserve by allocating a fixed percentage of your monthly cash flow to a dedicated capital reserve account.
Consider Long-Distance Real Estate Investing
Your first investment property doesn’t need to be in your current city. Many investors successfully manage properties in different locations. Platforms like Roof stock offer single-family and small multifamily rental properties in attractive markets nationwide.
Also Read: Your Guide to Long Distance Real Estate Investments.
Compare Cash Payment to Financing
In a competitive market, you may need to act quickly to secure deals. While cash payments or larger down payments can expedite loan approval, you can refinance at a later date to access some of your initial investment if needed.
Build Your Local Real Estate Team
Purchasing an investment property differs from buying a home. Assemble a team of professionals who understand income properties, including a real estate agent specializing in investments, a local lender, an attorney, and a reputable property management company.
Analyze Markets on a Macro Level
Not all markets are equal for investment properties. Consider factors like population growth, employment trends, income levels, rental demand, vacancy rates, housing price trends, neighborhood quality, school rankings, and crime rates when selecting a market.
By following these steps and being mindful of potential risks, you can make informed decisions and embark on a successful journey into real estate investing.
Bottom Line
Real estate investment offers both opportunities and challenges. By understanding the cyclical nature of real estate markets and the benefits of long-term ownership, you can make informed decisions. It’s crucial to prepare financially and mentally before buying your first investment property.
Potential risks, such as negative cash flow and unexpected repair bills, should be addressed through diligent analysis and preparation. Additionally, managing vacancy rates effectively is essential to maintaining a healthy investment.
Planning ahead involves taking care of your personal finances, strengthening your credit score, and building business cash reserves. These steps lay the foundation for a successful investment journey.
Furthermore, considering long-distance real estate investing and analyzing markets on a macro level can expand your opportunities. It’s essential to develop a local real estate team, master financial analysis, and eventually take the leap into the world of real estate investments.
By following these steps and remaining focused on the financial aspects, you can maximize the profitability of your first investment property and build a diversified, wealth-building portfolio.
Also Read: 10 Expert Tips to Increase Your Home Value.
