If it is your first time buying an investment property, it can be daunting: What type of property should I invest in? How much should I put down as a down payment? Which neighborhood should I invest in? Is this the right market timing to invest in a property?

Before you bombard yourself with a million questions, read on the following steps for buying your first investment property with confidence.

Step 1: Determine Your Investment Goals & Strategy

Perhaps the first, and the most important question, one should ask himself/herself is: Why am I investing in properties?

Some people invest in real estate for long-term appreciation and diversification of their investment portfolio. Some invest in rental properties that cash flow well and produce extra income. Others just enjoy fixing and flipping houses while making a profit of their labor and home improvement skills. 

Having clarifications on your long-term investment goals and your motivation in pursuing real estate investment helps you decide on your investment strategy and achieve your objectives better.

Being one of the most illiquid, traditional assets, real estate isn’t for everyone. For example, with buy-and-hold real estate, an investor will typically purchase a property, hold it for at least 5 years or more, and then sell or refinance the property. 

If you are not the patient type who can wait for 5 years or more for property appreciation, consider fix and flip. In a fix and flip scenario, it takes from 3 months to 12 months on average to finish the project and sell for a profit.

Therefore, understanding your investment style and strategy is crucial for your real estate investment endeavor. 

Here are some popular real estate investment strategies:

• Buy and hold – buy a property and hold it for an extended period of time for home value appreciation (you can live in the property or rent it out)
• House hacking – buy a multifamily home, live in one unit and rent the other unit(s) out
• BRRRR – buy (a property at below-market value which you can add value by improving it), rehab, rent, refinance and repeat
• Fix and flip – buy a property at discount, fix it up and sell it for a profit 
• Wholesaling – find a distressed property for sale, put it under contract, find a third-party buyer and harvest the difference in prices
• Syndication – join a group of investors pools together capital to jointly purchase a large real estate property and receive passive income
• REITs – invest in Real Estate Investment Trusts and receive dividends

You can use one or a combination of these strategies in your real estate investment portfolio. In addition, your financial situation and ability to leverage will also influence which strategies make more sense to you.

Step 2: Gauge Your Financial Situation

The next question you should ask: How much capital can you allocate into real estate deals in the next 3, 5 and 10 years? Developing a feasible financing plan lays the foundation for determining your real estate investing strategy. 

If you have zero to small amounts of capital to invest in real estate, you might want to use more leverage in your investments by taking out a mortgage. Consider a VA or FHA loan which allows you to put down as little as zero to 3.5% as down payment if you qualify.

If you decide to apply for a FHA loan, check its requirements before applying. One of the important criteria for a FHA loan is that the home must be the borrower’s primary residence; with this financing method, house hacking is a great strategy for buying your first investment property.

If you have more capital to invest in properties, you can put down 20% or more as the down payment to avoid paying for PMI (Private Mortgage Insurance), a type of insurance that conventional mortgage lenders require when homebuyers put down less than 20 percent of the home’s purchase price.

If you want to avoid a mortgage and interest payments at once, there is the option to buy your first property in cash. Risky and illiquid it might seem to most investors, this all cash strategy has its own benefits – close the deal faster, no mortgage, interests or other fees and earn rental income right away. 

How you should allocate your capital also depends on your investment portfolio size and timeline. But if you are unsure of your long-term goals, you can start with the financing and investment strategies for the next three years and then adjust them later as you gain more perspective and experience.

Step 3: Find Your First Investment Deal

Having your financing and investment strategies sorted out is half the success! Now you are executing your plan and vision. 

As a beginner real estate investor, you might want to work with a seasoned investor-friendly agent or professional to shine some light on the deal searching process. 

At the same time, learning to analyze the investment deal yourself is an important education for real estate novices. Get the math right. Calculate important investment ratios to help you evaluate the potential deals. Here are the 5 Property Investment Ratios You Should Know.

DealCheck is one great tool to analyze your first investment property. With DealCheck, you can analyze, view & compare your property analysis and financial ratios in one place: 

Use the promo code PASSIONATE for 20% off when you purchase any products on DealCheck

Summary

Finding the right property to invest in isn’t gonna happen overnight – be patient, check listings and do deal analysis regularly, go to open houses, talk to real estate agents, keep a good credit score and healthy relationship with the lenders. Opportunities always present themselves to those who are prepared.

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Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational and entertainment purposes only. Read our full disclaimer here.