You are interested in buying a property and you can’t wait to get started with the process of searching for one, which can be both exciting and rewarding. However, it’s important to know that you are also making a major financial commitment and you will potentially have to do a lot of work. Investing in real estate has its benefits as it is a source of passive income. This means that it will never dry up nor mature. Instead, ongoing income is provided with no loss of assets.
1. Know Your Priorities
Before you start the process of buying a property, you need to have a firm understanding of your priorities. What kind of property are you looking for exactly? How long do you intend to use this property? Will you be living on this property?
What should be high on your list of priorities is the level of commitment. Especially if you are married and along with your spouse you buy your first home, you need to make sure you have backup plans and an exit plan in case everything goes south with the purchase. From the start, if your level of commitment to buying a certain house isn’t where it needs to be, then you need to stop before you buy and review your priorities.
2. Have a Plan
Along with having the right priorities, you need to have a plan in place for the property you are buying. Is this property your forever home? Is it just a starter home to build up equity? Your search for a home will have more structure if you can determine what this property’s role will be in your plan. It can help to look exclusively in areas where either resale or rental properties may be easier for you, or you may want to invest in an up-and-coming neighborhood. It is highly recommended to have a real estate agent help you create a plan.
3. Crunch the Numbers Correctly
Miscalculating costs, values and rental prices of properties is one of the most common mistakes you can make as a first time real estate investor. Accurately calculating cash flow and house flipping profits are not intuitive. If you only intend to flip a property or buy a rental property to renovate, first know the costs of repairs. Contractors can sometimes be very difficult to work with, and renovations rarely go according to their initial plans. More often than not, contractors promise too much and end up delivering too little, both in costs and in time.
For your first investment property, keep it to just minor cosmetic repairs. Next, budget a large cost overrun reserve to handle the issues that will inevitably arise. It’s also wise not to tell the contractor about this reserve because otherwise he might find a way to spend it.
There are many costs and expenses to account for if you plan on renovating your first property. In the beginning, you should budget 50% extra as a reserve for any renovation costs, and an additional 50% cushion for estimated carrying costs. There is the After-Repair Value (ARV) to consider, the After-Repair Rent if you keep the property as a rental, and the non-mortgage expenses you will have to factor in. These non-mortgage expenses can include property taxes, property insurance, maintenance, property management costs, and major repairs and capital expenditures, to name a few. Expect these same expenses to average around 50% of the rent.
4. Practice Patience
One critical thing to remember is that the first property you purchase is a financial investment. When it comes to real estate, there is no room for emotional investments. You may find yourself emotionally attached to the first property that catches your interest. On the surface, you may love everything about this property and think that you would love to retire in that location. However, emotional investments lead to bad decision-making and “intuitive investing” such as guessing the time of the market.
Searching for the right property will take much more than reviewing only one property. For instance, if you make offers on 12 properties, it’s probable that 4 of those sellers will negotiate with you, and possibly 2 of them will reach an agreement with you. Finally, one of them will back out of the deal, and the other one will successfully close with you. This is partially how real estate works. Ultimately, you have to practice patience to see deals through, whether they succeed or fail.
5. Freely Negotiate
Negotiating is at the heart of the process of buying properties. Sellers expect you to do it, because otherwise they will second-guess the purchase price and wonder if they should have drove up the price. Knowing how to negotiate real estate begins with research of the seller. Gather as much information on sellers as you can, such as their sense of urgency in selling, why they are selling, and when they want to move if the property is occupied by an owner. A real estate agent can help you learn more about a listing agent. Be thankful to know that listing agents often get talkative.
When negotiating, make the lowest offer you think the seller will take seriously enough to make a counteroffer. If the seller wants to close very urgently, don’t be surprised if the selling price stays low. Build a seller concession into the negotiation so that you can reduce your cash due at settlement. The main thing to do is set a ceiling price before making an opening offer. Put it in writing, and tell someone that ceiling price to lock it in place. After negotiating, if the seller won’t accept a number under that ceiling, then simply prepare to walk away.
Some sellers will call you back a few days later and say they can reconsider your offer, whereas other sellers will bluster and posture. By staying emotionally detached, you can freely walk away from deals you don’t like, which allows you to freely buy better deals. This is why it helps to freely negotiate.
6. Review Turnkey Properties
Contractors, permits, and refinancing for a long-term mortgage can be too stressful for some first-time investors. If you can’t oversee a renovation project right away, then you should consider buying a turnkey property instead. Properties that are already rented to legitimate tenants or properties that are in rent-ready condition can be bought on the market.
You can easily buy turnkey properties anywhere in the country by using various real estate platforms. One such platform is Roofstock, which helps you with large-scale investing and allows you to track and optimize key figures via a cloud network. Each listed property on Roofstock also has an abundance of data that you can use to make an informed decision about whether to buy or not. This data ranges from local market data to both historical and forecasted home value trends. You also get two guarantees from Roofstock: you are first allowed to return the property at no cost within a 30-day period, and you are also allowed to rent the property to a tenant within 45 days of your purchase.
7. Look at Mortgage Options
If you are in the favorable position of being able to pay cash for a house straight up, then you will be just fine. However, if you are like most people who don’t readily have cash available, then you might want to look into the various forms of a mortgage loan.
Calculating your debt-to-income ratio isn’t as easy as it sounds since it factors in specific incomes and debts or expenses. The debt-to-income ratio (DTI) consists of total debt payments divided by your gross income before tax either per month or annually, which is expressed as a percentage. You use the DTI to indicate your debt level. This is key because you have to factor in how much you will have for a down payment.
Look for the best interest rates and features possible in a property. If you can’t make an adequate down payment or have bad credit, spend more time improving your finances before you consider buying a home.
8. Learn the Legal Formalities
Before you buy a property, it is always essential to make sure that it is compatible with all legal documents. The best course of action to take is contacting real estate agents regarding how to obtain legal information. Real estate signage or prints in front of a property serve as a good clue of how legally safe that property is. Analyze the level of professionalism and find information online about these materials. The real estate company associated with the selling process must be reputable or else you will not have an enjoyable purchase.
The legal aspects of real estate include promissory notes, guaranties, mortgage defaults, and the Uniform Commercial Code. Promissory notes live up to their name, documents that declare a promise made by one person to pay a debt that is owed to another person. The writer of this note states their promise to make a payment of a specific amount to the payee.
Parties that sign an agreement is known as a guaranty. These parties accept responsibility of debt payments. With this agreement, lenders are reassured that they will be repaid for the money that was loaned to any borrowers. A mortgage that hasn’t been paid for in a specific time frame is known as a mortgage default. Once a mortgage passes this time frame, it is considered to be in default, which can instantly and negatively impact a person’s credit report and score. Mortgage defaults can also result in losing your property due to an order of foreclosure and sale of that foreclosed property
Lastly, there is the Uniform Commercial Code, which consists of a set of codes that maintain control over any commercial transactions that are done. All 50 states have adopted this code and it has been approved by the American Law Institute and the Uniform Law Commissioners. The Uniform Commercial Code has helped alleviate issues related with commercial transactions, enabling smoother transactions overall.
9. Beware of Appreciation
The belief that real estate always goes up in value is only a myth. Homes typically do increase in value, but if you are banking on this typical occurrence, then you are blindly speculating, and not properly investing. If you enter real estate with the intent of flipping houses, use today’s housing market prices when flipping. Long-term rental investors are encouraged to buy properties based on today’s cash flow.
Home values can and do collapse, but rents remain very resilient in real estate. The best example of this is the Great Recession period from 2007 to 2009 when home values dropped by 27.42%, but rents continuously rose, according to the U.S. Census Bureau.
Facts like these are part of the reason why rental investing works. If you know how to forecast cash flow, you can accurately calculate the returns on any investment property. You can also opt to invest in only high-yield properties, if you prefer. Investing in rental properties based on current rental income allows you to welcome any appreciation that occurs.
Judging from the list above, it may feel like it will take so much time and effort to get the first property purchase right. To a small degree, that is the reality of the real estate business. Investing in real estate is not for everybody. In the cases of many people, there is not enough patience and discipline to see the right deal close.
If you have legitimate interest in buying a property, as well as the patience and discipline, then you will see predictable returns, favorable tax benefits, and high-yield passive income. There are plenty of options for real estate investing, including living in a property via house hacking. This can be done with the help of roommates (think foreign exchange students, for example), renting out rooms on platforms like Airbnb, or renting out an accessory dwelling unit.
If you are generally good with numbers and can cooperate with professional real estate agents, then buying your first property will not be the headache some critics make it out to be.