Buying your first investment property isn’t easy. It’s scary, stressful, and difficult.
I remember how stressed I was when I bought my first property, I could barely sleep at night.
Out of all the steps, this is the hardest one.
But, it doesn’t have to be hard.
I will break down the purchase process in a few simple steps and help you become an expert at all 3.
The 3 Simple Steps to Buying Your First Investment Property
First, I want to tell you how I managed to get through it. As I mentioned before, I stumbled into my first property completely blind and with no plan. I was a glutton for punishment clearly because I wanted more.
So I bought my first flip. I saved up a lot of my own money, borrowed from friends, and financed the rest on credit cards. It didn’t go so well, but I learned a lot and didn’t lose money (luckily).
At one point, I couldn’t even afford to buy groceries. I can’t even describe how close I was to failing.
I sold that deal and bought my next deal less than a week later. The third deal is when I started to figure it out and I became a real investor.
A 4 unit rental property was listed for 150k. It was in decent condition but it had absolutely terrible tenants, and the owner lived in Florida. I could tell the owner was desperate to sell, so I offered 60k. We finally agreed to 75k. I got such a good price I was able to pay cash for it.
I did a little work just to make it nicer (under 10k), then I went to get a mortgage. It appraised at $180,000. That allowed me to take a $135,000 loan on it, put about $40,000 in my pocket, and lock in some nice rent income for the rest of my life.
You see, it was on my third deal that I figured it all out. Up until then I was just lucky I didn’t lose my shirt. Everything started to turn around after I made this purchase.
It still took years to figure all the details out, but every deal has followed a pattern…and all it took was for me to become an expert at 3 things:
- Finding Deals
- Analyzing Those Deals
- Financing Them
It seems obvious, but it’s really not. If you are not an expert in these 3 things, you won’t get far as an investor.
How to Find Good Investment Property
This is the hardest part actually. The most experienced investors are able to analyze deals and secure financing easily, so they spend nearly all their time just trying to find deals.
Why do you think people with money are knocking down the door to find experienced investors to give their money to?
It’s because this skill is valuable. If you have a good system to find deals, you are worth far more than the person with $50 million to drop.
But, I’m not going to talk about how to create a lead generation machine, fill your pipeline or anything along those lines.
You are reading this because you want to get started investing. So, I’m going to talk about how to find your first deal.
It’s important to first discuss where you won’t have much luck finding deals:
Real estate agents are Notoriously Bad at Finding Deals
Finding good property to buy is hard and requires a lot of effort. You may have to put a dozen low-ball offers in before you even find one person to negotiate with.
A person paid on commission will do the least amount of effort required to secure a sale.
So, you can see that it is pretty unlikely that you will find an agent that is willing to put in the countless hours of work, just to find you a cheap property. Cheap properties pay out bad commissions anyhow.
This is why I became a real estate agent. I could write 50 offers and not worry about wasting anybody’s time but my own.
Be cautious of wholesalers
I wasn’t joking when I said finding deals is the hardest part. Be wary of a person who claims they are great at finding amazing deals on a regular basis with the intent of selling to you at below market prices… It’s probably not true.
Don’t get me wrong, there are a ton of valid reasons why an investor may ‘wholesale’ a deal (sell a great deal at a discount to unload it fast so they can free up cash for something more important).
There are other investors who have such a good lead generation system and pipeline of potential deals that they may not have the resources to get to a deal. These may be great finds and should definitely be considered too.
I’m not saying you should be cautious of “wholesale deals,” I’m saying you should be cautious of “wholesalers.”
I have yet to find a person whose entire business is to ‘wholesale’ and who actually had good deals. They are good at is finding a slight discount on a property, and selling it to a less sophisticated investor who just wants to park money in single family residences. Not a great deal for a person without a great strategy.
It makes sense when you think about it – financing good deals is the easiest part, so if the deals are so great, why haven’t they found money for the deal? It’s because they aren’t great deals and they don’t want to keep them.
How to Find your First Property
I’m going to start by laying out the obvious:
Your hometown may not be a good place to invest.
I read all over the internet that people think it’s impossible to find good investment properties because property values in their area are very high compared to rents. So, let me say it again:
Where you live may not be a good place to invest.
…and I’ll add to that:
Single Family Residential properties are not good investments in MOST areas.
Here are some signs that SFR properties may not be a good buy in your area:
- If you live in an area where most people are homeowners and a small fraction are renters, it’s probably not a good place to invest.
- If the area is almost entirely single family residential properties, it’s probably not a good place to invest.
- If the median income is well above average, it’s probably not a good place to invest.
Of course, this doesn’t mean there won’t be any good deals… After all, you can find gold and jewelry at the beach, I just wouldn’t make it part of my retirement plan.
You should start by finding the closest neighborhoods that are amenable to investment property.
- The majority of residents are renters.
- There is a mix of property types (multi and single family)
- Average monthly rents are 1% of the average selling price (or higher) for the property type you are looking for
Now that you have your target market, you need to find your first property. Let’s remember our goals:
- Gain experience as a landlord in order to get access to commercial lending
- Make a little cash to help you fund your next deal
What I’m saying is that your first investment property doesn’t need to be an amazing deal – it needs to accomplish your goals. Once you have some experience, a pipeline of deals, and access to commercial financing (or private money), then you can find those steals.
Financing your First Real Estate Investment
I went into this a little bit in the section about getting your finances in order. The simple fact is that if this is your first investment purchase, you won’t qualify for commercial lending unless you are very wealthy.
You will need to qualify for a standard home mortgage – FHA, VA, USDA, Conventional, or others. If you already own a home and have a high debt to income ratio, it may not be possible to qualify for a second mortgage.
You need to adjust your life so you can qualify for a loan. There is simply no way around it.
Fortunately, part of the potential rent will often be counted toward your income, so it helps with the ratios.
The good news is that once you qualify for commercial lending, it becomes very easy to get financing.
Alternative Strategies to Buying Your First Investment Property
For those of you who just can’t qualify for traditional lending to get into your first property, there are some alternatives. They may not be easy, may require a lot of effort, and also require some sacrifice.
Start Wholesaling Properties
Remember those people I warned you about? I never said they don’t make money, I just said you may not want to buy from them.
Instead, you could become one.
If you could earn enough money, it could finance your purchases. It may also count as ‘experience’ when you seek financing (it may not also).
It will help you fill up your deal pipeline too. You can take the good deals for yourself and sell those bad deals to those buyers who aren’t really looking for great deals (they are just parking money, remember?).
- It requires a lot of effort
- You need to be wary of “net-listing” laws.
- You may be selling deals to the same people you want to work with in the future.
Start Flipping Properties
A lot of investors get started out as house flippers. It isn’t really “investing” (as I explain: Flipping vs Renting), but it can be very lucrative. If you can flip a 4 or 5 properties over the course of a year or two, a bank may consider this ‘experience’ they need in order to check that box.
Also, the cash you earn could easily go toward buying several rentals.