How to Start Your Real Estate Investment Journey
- Real estate is its own asset class and one that should be considered for a well-diversified portfolio.
- New investors can buy properties by becoming a landlord.
- Property management companies and certified home inspectors can be invaluable when evaluating and managing potential properties.
Investment properties are a popular and consistent way to build generational wealth. With a well-chosen strategy, investors can earn predictable cash flow, diversify their investments, save money on their tax returns and enjoy an asset that appreciates over time.
If you’re considering buying an investment property, read on to learn the steps new investors should consider when embarking on their real estate journey.
Investment Property Benefits
Before buying your first property, let’s review what you’re playing for.
Cash flow: Cash flow comes in as monthly rent from a conventional 12-month lease, daily or weekly revenues from a short-term rental arrangement, or a combination of the two.
To get a true picture of the potential cash flow from your investment, you need to look at the cash added to your account (rent revenue) and the cash subtracted from your account for mortgage payments, property insurance, and other expenses.
These expenses can be painful in the first few months. As you gain managing experience and begin paying down your loan, you’ll see your revenue outpacing your maintenance costs.
Appreciation: Appreciation is simply the added value of the property over time. You don’t have to undergo significant renovations as the value will change with the market.
This is not to say that properties can’t lose money—real estate can lose value just as any investment. The Great Recession from 2007-2009 is still a fresh example of real estate depreciation. That said, real estate prices generally rise over time, driven by global inflation or a growing economy in an up-and-coming town. A property that appreciates over time can generate profits when you sell it or drive generational wealth if you hold onto it long term.
Recommended Read: U.S. Housing Market Starts to Cool Down
Tax Returns: Real estate, as with many other businesses, allows you to deduct the expenses associated with the business, creating savings at tax time. A financial advisor or accountant can walk you through qualifying and non-qualifying deductions, but generally, the costs of buying, maintaining, and managing an investment property are tax deductible.
Diversified Portfolio: Diversity is great for lots of reasons. In finance, a diversified investment portfolio will protect your money when tough market trends come around. If you have all of your cash in one stock account, the risk of losing your money is higher than if you spread between different stocks or types of investments. Real estate is also considered to be stable and safe for owners and investors.
Your Property Investment Playbook
Once you’ve decided to buy an investment property, the next step is to determine what type you’re interested in and how much you’d like to participate.
- Do you want to buy property far from where you live?
- Do you prefer a property that's close to your primary residence?
- Are you interested in taking a hands-on role with maintenance?
- Would you rather hire a property management company to stand between you and your tenant?
Your strategy doesn’t need to be complicated, but setting your budget and risk levels will act as lines in the sand when looking for properties.
2. Get Pre-Qualified
If possible, get pre-qualified before starting your search. For investors considering buying a small multi-family property and making it their primary residence, government agencies such as Fannie Mae, Freddie Mac, the Department of Veterans Affairs (VA), HUD, and FHA can be ideal funding sources. For example, the required down payment can be as low as three percent or even zero percent through the VA.
The primary purpose of getting pre-qualified before looking at properties is to determine the maximum amount you can spend. Your goal should always be to spend much less than your max. Pre-qualification is also a stamp of approval from your lender, increasing the likelihood that any offer you submit is accepted.
Recommended Reading: Tips for Buying an Investment Property on a Budget
3. Using a Certified Home Inspector
A home inspection is highly recommended before closing as part of the due diligence process of buying a home.
Regardless of the type of property you buy, a home inspection can save you from potentially costly repair costs down the road. A certified home inspector can point out items that an untrained and often over-eager eye may miss.
Inspectors can also prioritize issues, separating out deal-breakers (like uninsurable properties) from large but once in a generation costs like a new roof.
4. Using a Property Management Company
You’ll want to use a property management company if you want to take a more passive role or if there are some tasks you don’t feel comfortable doing. Especially when you add more properties to your portfolio, you may not have enough time to manage them all.
A management company can help you maintain the property, collect tenants' rent, and market the property when you have openings. They can also be a good buffer when dealing with tenant disputes or complaints.
The Money Wrap-Up
Owning an investment property can help you earn incremental cash, lower your tax burden and build generational wealth. However, before donning your landlord hat, take time to define the scope and scale of your strategy from a budget, geography, and management perspective.
Don’t let lack of time or experience deter you from building a real estate portfolio. Working with a certified home inspector and a property management company can help you fill in those gaps.