“Ninety percent of all millionaires become so through owning real estate.” – Andrew Carnegie
If you’re thinking about throwing your hat in the real estate investment ring with no idea how to do so, you’re not alone. Real estate investing may seem overwhelming, but it’s probably much more accessible than you think.
We’re breaking down everything you need to know about buying your first investment property. In this article, we’ll cover:
- The benefits of owning an investment property
- What to look for in an investment property
- The step by step process of buying your first investment property
- How to choose the right investment property management company
Benefits of owning an investment property
Owning an investment property means securing a stable source of passive income. After your initial investment, you get to sit back and collect a steady cash flow. This is a great way to pad your retirement fund, save for your children’s education, or simply provide an additional source of income.
As Mark Twain put it, “Buy land, they’re not making it anymore.”
People will always need a place to live, giving real estate an inherent demand that not many other investments have. On top of this, real estate is almost always appreciating in value. In 2022, housing prices are predicted to climb 2.9%, according to Realtor.com, and an impressive 5.7%, according to The National Association of Realtors.
This means that if you decide to sell in 2022 and on, you’ll come out with a profit.
Tax deductions are expenses you can deduct from your income to reduce the total amount of taxable income. And as an investment property owner, there are several tax deductions you can take advantage of. Some expenses you can use for deductions are:
- Property taxes and insurance
- Mortgage interest
- Property management
- Property repairs and improvements
- Advertising expenses
- Legal and professional fees
Diversify your assets
One thing all investors agree on is that you shouldn’t keep all of your eggs in one basket. Not only can you make a hefty profit off real estate, but they are a safe and tangible investment. The same can’t be said for a lot of stock market investments.
What to look for in an investment property
Type of property
The first box to check is choosing the right type of investment property for you. Are you looking for a single-family home to rent out to long-term tenants? Or maybe a condo in a popular tourist town?
The great thing about investment properties is that you can easily hand the reins over to a professional management company. So while you sit back and collect your check, they’re handling the day-to-day management details.
Put yourself in the shoes of your renters. What perks do they get renting from you? Is the property close to restaurants, nightlife, and public transportation? Especially for vacation rentals, you’ll want to choose a place that makes it easy for your guests to get around. From an investment standpoint, think about neighborhoods in your area that are up and coming or have something of value to offer vacationers.
Of course, you wouldn’t be getting in this game if it wasn’t for the profit possibilities. You’ll need to do some math before deciding on your investment to be sure you can cover your costs and cut yourself some profit.
If you’re thinking of renting out the property, use a simple formula to calculate your rental yield. Let’s say you make $2,000 / month on a property worth $300,000.
Annual rent ÷ The value of the property x 100 = Gross rental yield
$24,000 ($2,000 x 12) / $400,000 = 0.06 x 100 = 6% Gross rental yield
A good gross rental yield will typically start at around 3%.
Steps to purchase an investment property
So you know all of the important factors to consider when choosing an investment property, but how do you actually get one? Let’s take a look at the steps to buying an investment property.
Research and choose your investment strategy
Investment properties come with several options, each with its pros and cons. You’ll need to consider whether you’ll rent to long-term tenants or short-term tenants like vacationers and Airbnb guests.
2. Decide how you will manage your investment property
Next, think about how you’ll manage your property. Will you handle the day-to-day details yourself or outsource to a professional property management team?
Think: Cleaning between guests, managing booking, promoting your listing, providing guest support. The right property management team will handle all of this seamlessly and provide beginning to end service.
If you’re on the fence, click here to learn more about the pros and cons of hiring a property manager.
3. Assess your financial situation
As an investor, you’ll be required to put more down than you probably did with your home purchase. So it’s not a bad idea to start saving before you’re ready to pull the trigger. You aim to have about twelve months’ worth of savings to buy an investment property. It’s also not a bad idea to do what you can to increase your credit score and pay down other debts.
4. Get pre-approved
In a seller’s market, a letter of pre-approval is essentially your ticket in the door. This is what shows sellers that you are serious about your offers and that you’re prepared to follow through. Getting your letter of pre-approval ahead of time can also prevent mishaps down the road, so you’re not scrambling to get one at the last second.
5. Assemble your team
There are a lot of moving pieces when it comes to real estate. Behind you, you’ll want to have a team of trusted professionals such as a real estate agent, inspector, appraiser, contractor, lender, and property manager.
Part of choosing the right people for your team is learning to ask the right questions. Click here to learn about what you should be asking when vetting property managers.
6. Make your offer
Once you’ve found that property that checks all the right boxes, you’re ready to make your offer. There may be some back and forth between you and the seller on negotiations, but once you reach an agreement, you’ll sign and officially enter into a contract.
Roughly 30 to 45 days after entering into contract, you’ll head to the closing table. A notary or title agent will walk you through the documents, and you’ll sign all of the necessary paperwork. Make sure you do a final walk-through of the property before closing to ensure nothing with the property’s condition has changed.
Casago – Experienced Property Managers
One of the ways you can set yourself up for success as a new real estate investor is by working with the right professionals – your property management team is no exception.
At Casago, we provide top-tier management services so you can focus on your careers and lives. We are the second-largest property management company in North America, and we offer our services all across the United States and Mexico. From the check-in, cleaning and maintenance to guest support via our live staff app, we go to great lengths to ensure that your property is taken care of and promoted to its highest potential.