Do you know how to buy an investment property, or is this your first time thinking about investing in real estate? Every real estate investor has a starting point. If this is your day one, you may feel everything from excitement to anxiety about launching your investment business. Rest assured that with the proper guidance from professionals like your lender, financial advisor, property management company, and real estate agent, you can generate rental income or fix and flip with success.
But before becoming an investor, you must first find suitable properties. How do you buy the ideal investment property? Here’s the general process in 10 simple steps.
1. Explore Your Financing Options
First-time real estate investors have various financing options, just like standard home buyers. Common types of financing include:
- Conventional mortgages
- Hard money loans (for fix and flips)
- Home equity lines of credit (HELOCs)
- Cash-out refinance
- Private loans
Each type has its considerations, so it’s crucial to explore their pros and cons to decide which suits your situation.
- Note: It’s challenging to use a federally backed loan, like VA or FHA, for investment properties since they aren’t primary residences.
2. Find a Realtor
Working with an experienced realtor is extremely important in real estate investing. Agents represent you in buying and selling real property, ensuring that terms are in your favor as much as possible.
They also offer specific knowledge about neighborhoods and access to MLS information that is difficult or impossible to find without an agent’s license. Realtors will make sure you take advantage of opportunities like off-market deals.
3. Get a Financial Advisor
Being a real estate investor involves a lot of crunching numbers. Figures like net present value, after-repair value, return on investment, and other formulas will help you get a realistic picture of how much cash flow you can make with a specific type of investment.
A financial advisor can help you strategize your earnings and make wise choices. Having this person on your side can help you strengthen your financial profile, such as improving your credit score and debt-to-income ratio.
- Note: It also helps to get a tax professional so that your tax returns contain no surprises. They will help you claim all your rental tax deductions and tax benefits to make sure you claim any credits on renovations and other operating expenses.
4. Get Loan Pre-Approval
If you need to use financing, getting pre-approved for a mortgage loan is imperative before beginning your search. Most real estate agents won’t show houses if you aren’t pre-approved because the offer won’t be strong. Getting pre-approved also lets you know how much you can qualify for so you don’t pick houses that are too expensive for your budget. You also can figure out how much you need for a down payment, your potential interest rate, and your potential mortgage payment amount for a specific price point.
5. Research Your Potential Markets
Every market has pros and cons, so it’s important to research potential areas where you want to buy properties. Your real estate agent can help you find a market or property type that can be a good fit for your needs and financial situation. For instance, many buy-and-hold investors prefer single-family homes, while others might prefer multifamily units.
Agents will keep you up to speed on local housing market trends and compare prices of similar properties in the area. This gives you the average rental price that locals are willing to pay, which you can calculate into your potential return on investment you can expect from any given property.
6. Find Investment Properties
The best investment properties are priced below market value. Your first rental property should be affordable, fixable at a reasonable cost, and good for your bottom line. Your real estate agent can help you find the best discounts through distressed properties, online listings, local newspapers, referrals from colleagues, auctions, and off-market properties. Good investments are profitable fix and flips or appealing buy-and-hold homes for renters.
7. Make an Offer
When you find the right property based on price, location, and other desirable characteristics, you should make an offer on it as soon as possible. Your agent should draft your offer, advising you what purchase price benefits you and any other terms. Then, you wait for the other party to respond.
8. Contract Negotiation Time
After you make an offer, the seller has time to respond. They may agree to your terms immediately or ask their agent to make some adjustments to your offer and send it back to your agent. This can be just one round of compromises or several. After all parties agree on the contract’s terms, everyone can sign, turning it into a ratified contract.
9. The Due Diligence Stage
Whether you plan to become a rental property owner or to flip a house, you should always complete the due diligence phase, or the time between your contract’s ratification and closing day. This is when you can conduct multiple inspections, request repairs, get an appraisal, and much more. If the property has deficiencies that make it no longer profitable, you can back away without any penalties.
10. Go to The Closing Table
The easiest step is the final one. On the contracted closing day, show up at the proposed place and time. You may have a remote closing if your title company and state laws allow it. Or, you may need to be physically present to sign some papers in front of an attorney. Either way, your agent will let you know what to do long before the closing date so you can make plans.
Learn How to Buy an Investment Property & More at Marketplace Homes
If you need a real estate agent to start your investor’s journey, then speak to us at Marketplace Homes. We will be glad to match you with an agent who can guide you and help you, from day one and beyond!
Alicia Persson is the real estate content writer for Marketplace Homes. She has several years of experience working in real estate teams that specialized in investments and property management. Before she joined MH, she was a freelance writer for 7 years, providing real estate and home living content for boutique digital marketing agencies.
She is a proud University of Virginia master’s graduate and enjoyed her undergraduate years at the University of Mary Washington. When she is not writing, she plays keytar and does female lead vocals in a local 90’s band or spends time with her amazing family.