How to position yourself to buy your first investment property

In this series of posts, I will show you step by step, how to buy your first investment property. Consider this your guide to find the right investment property for you, analyze it in depth and invest in it the right way. First, we will discuss the preliminary steps you need to take to set the correct expectations and position yourself for your first acquisition. This is absolutely necessary considering the amount of misinformation and marketing doublespeak that’s you have probably been exposed to as we all have.

Myths and Misinformation

Truth: The majority of what folks “know” about investing in real estate comes from infomercials, reality shows and other get rich quick “proven systems”. Sad but true. Let’s quickly debunk some of the common myths propagated in them.

Best way to profit from investing in real estate is to flip houses

What usually attracts people to flipping houses is speed. The prospect of making money fast by rehabbing and reselling a distressed home is irresistible. I get that. But have you noticed how all the home flipping reality shows have all of a sudden disappeared from TV? That’s because very few people are making any money flipping houses ever since the market turned. And therein lies the rub. The problem with flipping houses is that it’s very sensitive to market conditions – when the real estate market is up, people make money. When it’s down, people can lose everything. Ever wonder why all these gurus are selling books and tapes when they could make millions flipping houses?

You don’t need money or credit to invest in real estate

Actually, you need both if you want to do it right. The best financing is available to investors with excellent credit and ample capital and that’s where you should aim to be. Buying investment real estate with no cash or credit is a suckers game. All the options available to those with no money and no credit increase the risk and lower the probability of success tremendously. Real estate is the absolute best vehicle at your disposal to take your existing capital, make it grow over the long term so you can draw tremendous income from it. But trying to create your capital in real estate is a bad plan. It can be done but just because it’s possible it doesn’t mean that you should do it.

Position yourself to pull the trigger

If you want to invest in real estate the right way, you have to do it by design and on purpose. That means developing a long term game plan first, positioning yourself so you are prepared and ready then finally pulling the trigger. Making acquisitions without an overarching strategy will lead to inferior results every single time. Having a plan but being unprepared will cause you to miss out on important opportunities. And as you will soon find out, important opportunities equal hundreds of thousands of dollars in long term real estate investing. That said, what should your expectations be?

Capital

As of this writing, conventional loan guidelines for investment properties call for a minimum down payment of 20% of the purchase price. Let’s say you’re looking to acquire a property for $120,000. There are potentially three items that require cash investment on your part:

1. Down Payment (20% of purchase price) – $24K
2. Loan Closing Costs (3% of loan amount) – $2.8K
3. Minimal Make Ready (money spent to get property ready for rent) – $2K – $4K

So in this case, investing in this property will require a cash outlay between $28K and $30K. Of course this amount will vary up or down depending on the acquisition price.

Credit

Generally speaking, to qualify for the best interest rates available your credit score needs to be above 740 and the higher the better. This will come in handy especially after you acquire additional properties in the future.

Get Set

To complete your preparation and position yourself for your first investment property acquisition, you have to get pre-approved for financing. This means you will talk to a pro that truly understands and specializes in investment property financing and get affairs in order so when the right property comes along you are ready to go.

This will conclude the first post of the series. Next, I will show you what a typical investment property in Houston looks like this days and how to find the right one for you.

Stay tuned. I’m just getting warmed up.

Photo Credits: JudeanPeoplesFront Tutuwon