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Financial Literacy

A First-Timers Guide to Buying an Investment Property

A first-hand account from a 24-year-old average wage earner who did it himself.

When it comes to the journey of financial independence, one thing you’ll hear often is the power of investing in real estate. The ability to create more wealth by investing in a property (or properties) feels almost matter-of-fact at this point. But just a few years ago, I literally had no idea this was a thing.

I’ve lived in apartments almost my whole life, so the idea of buying a home seemed out of the distance for me. Even as I got older, I felt like there was no real need to ever personally own a home. I viewed home ownership as this daunting right-of-passage, where families will hemorrhage money through a lofty mortgage or expensive home projects.

I attribute that way of thinking to my limited view into how the people around me were leveraging their real estate. They weren’t, so it came as a total shock to me that there’s a whole world of people making smart real estate moves! Buying real estate to make you money?? Crazy!

Commonly referred to as “investors,” everyday people are making intentional home purchases. One of them being my boyfriend, Mike. At 24, he bought his first investment property, proving that this is possible for anyone, at any age.

Despite our relationship, I actually wasn’t involved in the process. Since we’re embarking on buying an investment property together (my first one!), I thought it’d be perfect to ask him to break down what that process looked like, plus other gems first-time investors can take with them on their journey.

For anyone embarking on their journey of buying an investment property or not sure where to get started, here’s a first-hand account from someone who did it.

What did you know about buying real estate before buying your first investment property?

“From a general standpoint, I had a decent understanding of what to expect. I worked in the mortgage industry for about two years and understood the financial side of it. I also went to school for real estate and had my license when I graduated. I didn’t understand what it was like being in the drivers seat and didn’t think too much about it from an investment standpoint until I started reading some [real estate investing] books I could get my hands on.

The major key for me was when I discovered Bigger Pockets. It’s a hub of resources and information. When I first found it, I was taken aback because I didn’t realize how powerful real estate investing could be. As I listened to more and more podcasts, I learned that there’s so many options and strategies. One thing they stress is taking action, which is what I felt like I could do (and needed to do) after hearing all of this information. So I decided to dive in, taking it one step at a time. It can be nerve-wracking in the beginning because it’s a lot to tackle, but breaking it down helps.”

Tell me about the steps you took to get started.

“The first step is to surround yourself with like-minded people who either done it before or are educated about the subject [of investing]. Self education is really important. Reading, consuming videos, breaking down some of these big concepts. Going to local Meet Ups is also really valuable. But over-consumption can lead to no action. Even if you don’t feel confident, you need to dive in and take action.

Next, you’ll need to find a local real estate agent. If you know someone personally, or have friends and family who know someone, get in contact with them. There’s so many. Interview them and see what their experience is working with real estate investors. It’s not required, but adds a lot of value if they’re an investor themselves or have helped other investors in the past. They’ll know how to connect you to the right opportunities.

I personally ended up going with the agent who helped my mom find her house. When we connected, I learned that he’s also an investor, so that gave me the confidence to know that he understands what I’m looking to do.

Once you find your agent, ask them to set you up with listing alerts. This is completely free and costs you nothing. They’d be more than happy to do it since they want to build that relationship with you. Give them your criteria. This includes the range you’d want to buy a property in, zip codes, the square footage of the house, and so on.

You can request to get monthly, weekly, or daily listing alerts. If you’re aggressively looking to purchase, I’d suggest daily so you can be on top of new listings as they come up. In my experience, I’ve seen good properties go quick, so don’t take for granted how long a property will stay on the market.

As you see properties come on the market, ask your agent to set up a showing. I would suggest doing this even if you’re not ready to pull the trigger just yet, because you can give yourself an idea of what you like and don’t like in a property. Pictures can only show you so much. You may also run into the opportunity to meet tenants that already live there, or you’ll meet the neighbors that will tell you about the area.

Most importantly, you’ll want to figure out what type of property you’ll want to buy. If you buy a single-family house, you can rent that out to a family. Or a multi-family property, which consists of duplexes, triplexes, or quads. If you get above four units, it steps into commercial lending. You really don’t know what you’re interested in until you see them. Have your agent set up your listings to include those types of properties. I knew that I wanted to buy anywhere from a duplex or quad, since I wanted to rent to multiple tenants so I could increase my cash flow.

Simultaneously, you’ll want to find out what you can afford. When you do connect with a realtor, chances are they will connect you with their preferred lender. There’s no obligation to use them, but that’s why it’s good to work with an agent who has investing experience because chances are, their lender does too.

When you meet with a lender, they’re going to look at your assets and financials. They’re going to look at your credit score (or what’s called your “Lender Profile”) and they’ll be able to see what you can afford.

One thing I want to mention is that, just because you get approved for an amount, doesn’t mean you need to buy a property at that amount. I feel like it’s smarter to aim below that so you can give yourself some breathing room, especially with your first property.

Now that you know what you can afford and have your listings set up, it just comes down to finding the right deal to hit the market and pulling the trigger. Take your time. Once you do find a property, your agent and lender will run the numbers with you to see if it makes sense.”

First-time investors can feel as if they don’t have the adequate funds to get started. What was your financial situation as you started out?

“I wondered the same thing when I decided I wanted to make a move. I had to ask myself, can I afford a rental property? I was bringing in around $50,000 a year. I started to look at my spending and see where I could cut back.

As a result, I started being more conscious of my spending so I can save more at a higher rate. Make sure you keep your expenses low so you can save more. Not only was I saving money, but I partnered with a friend who also has an interest in investing. That’s another way you can invest in a property with little money, by partnering with someone.”

How much money do you need for an investment property?

“This depends on what you’re looking to do, along with your comfort level. Typically, an investment property four units or less will require at least a 20-25% down payment for conventional financing. On top of your down payment, you can expect roughly 3% in closing costs.

Another route you can take can be to “house hack,” a phrase coined by Bigger Pockets. This means you buy a property where you live in one unit, rent the others, and offset your mortgage expense with the tenants’ rent. The key with this method is that you qualify for residential financing which allows you to put as little as 3% down because this will be considered your primary residence.

At the end of the day, I would suggest having a strong relationship with a lender because they will be able to provide you with rough figures based off the sales price and loan program that you choose. Also, start using online mortgage calculators to practice analyzing deals in your free time as this will help further prepare you. There are several loan options available, so it is very important to connect with other investors and investor friendly lenders to understand what your options are.”

Mike created a simple Excel calculator that will get you analyzing deals quickly! Download his rental property calculator here.

Tell me about your actual buying experience and how you ended up buying the investment property you did.

“My partner and I went in on this property together. We only actually looked at two properties. There’s no limit to the amount of properties you need to look at.

The first one was a duplex. It was a good property, where both units were occupied and both were paying a decent amount for rent, so it was already cash flowing. We were taking a mortgage out regardless of the property we decided to buy and after we got the numbers from the lender, it was cash flowing less than we thought. A small cash flow is still cash flow, after all.

One thing to remember is that the list price of the house doesn’t dictate what you can offer. You’ll want to offer whatever it will take to make the deal work, which is why crunching the numbers is important. Even if you wanted to do some rough number crunching yourself, there’s investment property calculators that are designed to help you see the possible cash flow of a property. My favorite is from Bigger Pockets. You only get five free reports as a free member, but it was cool to see how it works.

The seller didn’t counter our offer on the duplex, and stood firm on their list price, so we decided to keep looking.

We went to see another property, this time it was a triplex that was built in the early 1900’s. A lot of the big-ticket items were newer, like the roof. The hot water heaters (all three of them) were new. It has two detached garages which we could collect rent from as well. It was really nice and large, and all three units were occupied.

The list price for this house was around $215,000. We felt what the owners were asking for was fair considering the size of the property. After we ran the numbers, we felt more than comfortable making an offer. There was another interested party who also had an offer on the table, so we bumped ours to $218,000. The seller was motivated and liked our offer, and we were able to get it.

That’s why it’s so important to know what you’re able to afford, which is why we were comfortable coming up in our offer. We felt good about pulling the trigger.”

What was the post-offer experience like? How is the mortgage process?

“After your offer gets accepted, you’ll have an inspection. The inspection includes a licensed inspector who will walk the property and do a detailed report of the property. This can take about an hour or more, depending on how large the property is. The report includes all the things they find, big or small. You’ll pay for this inspection, which can be anywhere from $500-$1,000. It took us about 35-40 days to close. 30-days is a standard, but we requested some repairs to be done prior to settlement based on the inspection.

When it comes to the mortgage process, you’re going to have a loan officer or lender that will be in charge of helping you determine the proper loan program or what kind of mortgage you’ll want (15 or 30-year). You can either have a fixed-rate mortgage or an ARM, which stands for ‘adjustable rate mortgage.’

Ours is a 30-year fixed rate mortgage and we pay the same amount each month. The payment includes principle, interest, insurance, and taxes. You’ll lock in an interest rate assuming you did a fixed rate.

After the documentation is collected, it’ll be sent to an underwriter at the bank or company you’re getting your loan with. Then from this point, it’s just documenting your stuff, like bank statements, W2s for wage-paying jobs, pay stubs, etc.”

What’s it like being a property manager?

“I know prior to buying our property, I heard people saying they ‘don’t want to fix toilets’ as a reason why they wouldn’t buy an investment property. If you’re going to go into it outlining all the negatives, that’s just a bad idea. Not everything is going to be roses and butterflies. It’s going to take some work, but there’s so many different variables that each property comes with.

There are property managers out there that you can pay to manage all the landlord tasks you may not want to do. If being hands-off is important to you, then you’ll want to budget for those fees when you’re looking at the numbers. We had no problem being landlords, so that’s not something we were considering.

If the property you bought is a little more dated and you can tell is going to need more work in the future, then you’ll want to budget for that as well. Wear and tear happens over time, but it’s not the end of the world.

We formed a really good relationship with our tenants where they feel comfortable calling or texting. We realized that even if this was our own house, things come up. But at the end of the day, it’s an investment so over time, it’s going to appreciate. The idea is that you’re going to be cash-flowing every month and you’re budgeting for an unexpected repairs. Anything that has a reward is going to come with some sort of risk.”

What should first-time buyers look for when visiting a potential investment property?

“I’ll be honest, I didn’t know what to look for when I started looking which is why it’s important for your agent to know what to look for and help you call things out when you’re at a property.

Look at big ticket items like the roof. See what kind of shape that’s in. How old is it? This will get disclosed to you. Look at the hot water system, look at the HVAC if it’s there. Look at the exterior like the walls. If any of these show signs that they don’t look good, it’s important to take note of that.

As an investor who was looking for a multi-family property, it was also important to look and see if there are separate meters for electric, washer-dryers, etc. This means each tenant will pay for their own utilities, and would be one less thing we needed to worry about each month.”

What did you learn that you didn’t know before this process?

“One important thing I learned was that it’s possible. You might hear people on a podcast and sometimes it sounds too good to be true. But at the end of the day, if you put your mind to it and stay positive and disciplined, you can do it. It’s not rocket science, it’s real estate.

It felt great to say that I did it and it made me more hungry. I also learned about being a property manager and doing things around a house. Growing up, I didn’t do anything around the house so now, I’m responsible for making sure things get taken care of.”

What resources should a potential first-time buyer check out?

“Check out the Bigger Pockets podcast and visit their website (which is free).

Read the book Set For Life, by Scott Trench, who is the host of the Bigger Pockets Money podcast. The book is also published by Bigger Pockets. It gives you tactical information on how to be purposeful with your savings to get that first investment property.

Lastly, read Rich Dad, Poor Dad. It’s real estate-related, but has so much more than that. It gets you in the mindset of being more conscious and wise when it comes to your finances. It simplifies things enough where you’ll wish you thought of these things sooner.”

Have a question on something we didn’t cover? Have something you want to add? Leave it in the comments!

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  1. Michael

    This is awesome content! Extremely valuable and powerful information for anyone to understand and implement. Keep it up!

    • jamiereedy

      Thanks, Michael! Glad you liked it (;

  2. Hannah

    Really great read!

    • jamiereedy

      Thanks, Hannah! Glad you enjoyed it 🙂

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