Securing your first investment property is a very exciting time. This could be the first piece of your real estate empire, and even if it isn’t, it’s almost certainly going to become a source of passive revenue that can help you achieve your other financial goals.
However, it’s important to recognize that not every investment property is equally valuable, and yours isn’t guaranteed to be a critical success. If you want to maximize the value of your first investment property and start your real estate investing journey on the right foot, there are several things you’ll need to scope out first.
The Value of Working With an Agent
Hypothetically, you can do all the due diligence on your own. Every item on the following list is something you can personally investigate and validate. However, most people benefit from working directly with a real estate agent throughout this process, leveraging their resources and expertise to get better answers to two critical questions.
Even better, get in contact with a property management team. If you plan on renting the property in the future, a property management company can help you evaluate the property for its cash generation potential, long-term appreciation potential, and more. Once you acquire the property, the property management team can also help you manage it, handling everything from initial repairs to rent collection and conflict resolution.
In any case, it’s a good idea to work with experts as you do your due diligence for your first investment property.
Things to Check Before Buying Your First Investment Property
Before purchasing that first investment property, be sure to evaluate the following:
- Your budget. Before you move forward with any purchase, it’s important to take a close look at your budget. How much are you really able to spend on a property? What’s the highest mortgage payment that you could tolerate paying in the event of a vacancy? How much income do you currently have, and what kind of loan might you qualify for? Even if a property is potentially rich in terms of cash flow and appreciation value, if it’s out of the scope of your current budget, it’s probably not worth considering.
- Your portfolio. You likely already know how important it is to maintain a balanced portfolio. If you invest too much in any single type of asset, it can expose you to excessive risk or throw off your overall returns. Accordingly, you should evaluate the nature of your portfolio before moving forward. Make sure the acquisition of an investment property isn’t going to expose you to too much risk and is going to help diversify your overall holdings.
- Loan options. Depending on your financial status and a handful of other variables, you may qualify for different types of loans or different interest rates. Shop around to see what types of financing products are available to you and compare them critically. Sometimes, even a small difference in the terms and conditions can add up to cost you or save you thousands of dollars.
- Planned expenses. When evaluating an investment property, you need to plan for potential expenses. There are some obvious, straightforward expenses that are relatively easy to estimate, including your mortgage payment, insurance costs, and property taxes. However, some expenses are much harder to estimate, such as repairs, maintenance needs, and extended vacancies. Always estimate conservatively to account for what you aren’t directly calculating.
- Neighborhood metrics. Closely examine the neighborhood where their property resides as well. What are the crime rates? How good are the schools? Is the area walkable and does it look beautiful?
- Comparable property values. Examine other properties in the area similar to yours. Are they selling for similar prices? How much are they renting for? These “comps” are arguably the best way to accurately estimate the value and potential income of the property.
- The property condition. For just a few hundred dollars, you can get a formal home inspection to find out everything that’s wrong with the property. Many of the issues your property inspector finds won’t be urgent or pressing, but this phase of the process is still important as part of your due diligence.
- Future potential. Finally, consider the future potential of the property. Have prices in this area consistently grown over the years? How is this neighborhood going to improve in the future?
These items represent the bare minimum considerations for buying your first investment property. In reality, most investors should go above and beyond this list. However, these fundamentals can help you feel more secure in purchasing your first piece of investment real estate – and ultimately set you up for success down the road.
