Key Takeaways
- Don’t even consider buying your first investment property until you have completed several preliminary steps.
- Even the most basic steps can contribute to a better homebuying experience.
- Learning how to buy your first investment property is just as important as taking action. Prepare yourself accordingly before moving forward with a purchase.
Aspiring real estate investors need to understand one thing: buying your first investment property doesn’t happen overnight. While the actual act of buying a home can take place in as little as a few hours, there are several important steps to consider before committing to the right purchase.
Everything, from getting your financials in order to identifying the area you want to buy in, warrants due diligence on your behalf. Therefore, if you want to make sure your purchase is in your best interest, there are a total of eight steps I highly recommend completing before you even think about buying your first investment property.
It is worth noting that the following steps are for those looking to buy an investment property with their own money, or a loan from their respective bank. That said, buying an investment property through a private money lender may not follow the exact same steps outlined below.
The following should give you a better idea of what it will take to learn how to buy your first investment property:
8 Necessary Steps To Take Before Buying Your First Investment Property
- Compile the necessary financial information in an accessible location
- Pay special considerations to your current and expected expenses
- Determine the exact location in which you want to buy a home
- Check your credit score early
- Aggregate all of your legal and tax documents into one place
- Find an agent that understands your particular needs and motivations
- Get pre-qualified, not just pre-approved (there’s a difference)
- Save, save, save
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What To Do Before You Buy An Investment Property
It is quite easy to get excited about buying a home, let alone your first investment property. Few investment vehicles can award savvy, patient entrepreneurs with the same returns as the housing market has proven it can in the past. In fact, there’s no reason not to get excited about the prospect of owning a home, whether you are investing in it or living in it. As such, it’s quite common for prospective buyers to get anxious about their impending purchases. Not that that’s a bad thing, but it’s worth noting that buying a home doesn’t happen overnight. In fact, there is an entire process (in and of itself) leading up to the process of buying a home, and that’s what I am here to tell you.
No entrepreneur in their right mind would advise a new investor to buy a home without putting in the proper work ahead of time. As I have already alluded to, there are several steps that need to be taken into consideration before you actually exchange cash for an asset.
As you grow more comfortable with the real estate investing industry as a whole, you may be able to eliminate a few steps from the list, but until then, here are eight simple steps new investors must take prior to buying their first investment property:
1. Gather Important Financial Documents
Those interested in buying their first investment property better have at least one important thing lined up: money. Of course there are the semantics (knowledge, opportunity, etc.), but generally speaking, virtually no real estate transaction can take place in the absence of capital.
You need to not only have money, but you also need to know where it currently resides and how to gain access to it. At this time, I recommend gathering all your financial documents and identifying how much money you have to work with. Documents may include, but are not limited to:
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- Each of your bank accounts
- Investment portfolios
- Retirement accounts
- Papers regarding the market value of large assets (houses and cars are a good example)
- Debt-to-income ratio
- Credit cards and loans
- Current debts
- Literally anything that influences your own net worth
- Once you have everything, you should be able to paint a clear picture of your financial situation. You should have a good idea of how much money is coming in, going out and dog-eared for the future. Perhaps even more specifically, you’ll have a better idea of how much home you can afford, or at least how much of a mortgage you can take on.
2. Scrutinize Current & Future Expenses
It isn’t enough to simply know where your money is coming from and where it is going. Buying a home is an expensive endeavor, one of the biggest people will take in their lifetimes; you will most likely need all the money you can get. That said, now is the time to take a closer look at your current and future expenses. Is it even possible to determine which ones are necessary and which ones are, well, not? I maintain that it is, and therefore you should do the same.
Take a good look at where your money is going and make sure it is absolutely necessary. Be honest with yourself and differentiate between the expenses you need to keep and the ones you could do without. The idea is to make sure you are benefiting from positive cash flow (making more than you are spending). At the very least, those with negative cash flow should reevaluate whether or not they are ready to buy their first investment property.
3. Decide On A Location
It only makes sense that you would decide on a location before you buy a home, but there is more to it than simply picking a spot you like; there are a lot of factors to consider. Not only should your first investment property come in at a price that warrants your attention, but it also needs to be in an area where there is demand. If for nothing else, it’s the demand for a particular area that will sell the home later, not the home itself. Remember the cardinal rule of real estate: location, location, location. As it turns out, location is the one thing you can’t change about a property, and it just so happens to be the most important.
Before you go rushing into any purchase, decide on a location that suits your needs. Often times, that means picking a particular neighborhood before the property. Remember, you can always change what you need to with the home, but the location will remain the same.
Mind due diligence and pick a good neighborhood; one that has ‘potential.’ That way, you know there will be demand, and a great selling point for future references.
4. Check & Address Your Credit Score
Those intent on using their own money to buy their first investment property need to not only check their credit score, but check it as early as possible. You see, credit can absolutely be repaired, but it’ll take time. If you know you are going to be buying a home sooner rather than later, checking your credit score should be one of the first things you do. That way, you will be prepared to make moves later. Provided your credit is up to par, you may not need to do anything else. However, if your credit score is less than impressive, you may need to take some time address the issue. It is your credit score, after all, that will persuade people to lend to your cause. You had better believe traditional lending institutions will only approve those with acceptable credit scores.
Long before you even look at your first investment property — perhaps even six months out — examine your credit report. Discover, for yourself, if there are any issues that need to be addressed, and take the appropriate steps to do so. Getting an early start should make the process a lot easier once the actual house hunting begins. At the very least, improving your credit score will prove to the bank that they can trust you. Credit scores do, after all, demonstrate an objective ability to keep and maintain debt obligations.
5. Compile The Necessary Tax & Legal Documents
If you are more or less unaware of the documents you will most likely need, the following list should give you a good start:
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- Several recent pay-stubs
- At least two years of tax returns
- Contact information for your current landlord or the details on your current mortgage
- Several recent utility bills
- Recent, up-to-date statements from bank accounts, credit cards, and any other accounts you may have
- Necessary IDs
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This list is not meant to be exhaustive, as everyone’s will be different, but it is a great place to start. At the very least, it will prepare you for several upcoming steps.
6. Identify A Trustworthy Agent
As an investor looking for your first investment property, there’s a good chance you intend to do the looking, and there’s nothing wrong with that. Refraining from working with a real estate agent could save you money if you know what you are doing, but I digress. While it’s true, working without an agent won’t require you to pay for anyone’s services, it could end up costing you more in the long-run, especially if you don’t know what you are doing. That said, I recommend hiring an agent if you are looking for your first investment property, or even your 100th.
A good real estate agent, at least in my opinion, is worth their weight in gold. What’s more, their services are as much an investment as the property you intend to buy. It will certainly cost you money upfront to hire a dependable representative, but their services will almost always save you time and money. So before you think about going down the home buying process alone, think again. Hire an agent; they are well worth the investment.
7. Get Pre-Qualified (Not Just Pre-Approved)
Despite popular belief, there is a huge difference between pre-qualification and pre-approval —while the two may sound similar, they are anything but.
Pre-qualification, as it turns out, is simpler, and for good reason: In return for a few credentials (financial status, debt, income and assets), one trying to receive pre-qualification will be made privy to an amount they could expect to borrow — emphasis on could. The resulting number is far from written in stone, and more of a guess than anything else. The idea of the pre-qualification process isn’t to land you the mortgage itself, but rather to facilitate discussions on how to proceed.
Pre-approval, on the other hand, takes pre-qualification a step further and is, therefore, more in-depth. In providing more intimate details about your financial past (and a processing fee), you can gain insight into how much money you will be able to borrow, down to the dollar. Not only that, but you’ll also have a better idea of interest rate obligations. Even more importantly, however, the pre-approval process will grant prospective buyers with a conditional commitment in writing for a specific loan amount — not a ballpark figure like pre-qualifications have become synonymous with.
Not surprisingly, sellers covet buyers with pre-approval letters more than those that are simply pre-qualified.
8. Save As Much As You Can
It is true what they say: buying a house isn’t cheap. Regardless of what you intend to do with the home — whether you are living in it or flipping it for a profit — there are always going to be a lot of expenses, not the least of which may be unforeseen. As such, it’s in your best interest to save as much money in your coffers as you can before you take the leap. That way, you will have a bit of a safety net should unforeseen circumstances arise. Conversely, it’s those that neglect to save that tend to find themselves in the most trouble.
Back To The Basics
I want to make it abundantly clear: the steps outlined above represent the most basic steps one should take before they buy their first investment property. They are not representative of a comprehensive checklist. However, they should serve as a good place to start for those that know they want to buy sooner rather than later. If that’s where you find yourself, I recommend using this checklist as a starting point, and branching out when you find it necessary. At the very least, this should get you on the right track to buying a home.
Would you have found it beneficial to follow a step-by-step checklist for your first investment property? Perhaps you know of some important steps that I left out? Please feel free to let us know your thoughts in the comments below.
