Step By Step Guide To Buying Your First Investment Property
Looking to get into the investment property market?
As a first-time real estate investor, you might be wondering what steps to take to buy your first investment property and maximize your ROI.
And you would be right to do your research before jumping feet first into the market. After all, buying a rental property is a significant investment.
Now, with all the information available online, understanding the best way to approach your investment journey can be challenging.
That’s why, to guide you on this exciting journey, we’ve put together an easy step-by-step guide highlighting the key steps you need to consider when investing in a rental property.
Save For a Down Payment
Before starting to look for the perfect rental property, you need to have a down payment ready. In Hawaii, you’ll usually be asked for a down payment ranging between 10 to 25% of the total sum depending on your personal situation and the lender. The amount you’re able to save as a down payment will determine what kind of property you’ll be buying as well as the location.
Now, even if you don’t have the down payment for the type of investment property you’re after, don’t be discouraged. Keep learning real estate investment strategies while saving, so you’re ready when you have enough for a down payment.
Work On Your Credit Score
Unless you want to purchase your first investment property with cash, you’re going to need to apply for a loan. And to increase your chances of obtaining a loan, you need to work on your credit score. This means that you need to pay down any debts and credit card balances before applying for a loan.
Here are a few ways to improve your credit score over time:
- Check Your Credit History: request a copy of your credit report for free via Annual Credit Report.
- Pay All Of Your Bills: most lenders useFico Scoreto grant loans.This means that your payment history impacts your ability to secure a loan for your investment property. So, make sure to catch up on past-due accounts and pay off any revolving balances.
- Limit Your Credit Utilization to 30%: credit utilization refers to the amount you currently owe divided by your credit limit. After the Fico Score, credit utilization is the second most important factor lenders will take into consideration when reviewing your application.
Note that to get lower interest rates, you should aim for a credit score of 740 and above. You can check your credit score on Credit Karma.
You’ll find more tips on how to improve your credit score on Investopedia.
Talk To A Lender
This is an important step, and it should be done before you start visiting properties. That way, you know exactly how much you can borrow and avoid wasting time visiting properties over your budget. Plus, timing is key when buying an investment property. Talking to a lender before starting your research means that you’ll be able to make an offer quicker.
Lenders will look at your assets, proof of income, bank statements, liabilities, and tax returns. Therefore, make sure you have all of these documents in order when you’re ready to talk to a lender.
Now, it’s important to know that deducting a lot of expenses from your income to reduce the amount of taxes you’re paying could prevent you from getting a loan. Why? Because the lenders will consider the amount you make after expenses to determine the loan they’ll grant you. And this amount will end up considerably lower due to tax deductions.
Look At Properties
Now, onto the fun part!
Once you’ve got all of your paperwork ready and you’ve spoken to a lender, it’s time to start looking at properties in the market. While it can be time-consuming, try to see as many properties as you can.
This will allow you to better understand the local real estate market and to define more precisely what you can get for your budget. And it will also enable you to research the area better and get a good grasp of the lifestyle and amenities, which are all important factors for tenants looking to move.
Also, as a word of caution, if you’re planning to buy an older home and renovate it, expect that the renovation cost will be on average 20% over what you were budgeting. It might also take longer than what was originally planned. So, make sure to include this when calculating your rental property cash flow.
Calculate Your Rental Property Cash Flow
As a first-time property investor, you need to ensure the rental property you purchase generates cash flow. Sure, buying at the right price is key as it will directly affect your mortgage.
But here are some other key things to consider when calculating your rental property cash flow:
- Down payment
- Mortgage cost
- Interest rate
- Property tax
- Additional expenses: these include things such as lift or pool maintenance, pest control, vacancies, etc.
- The rent: to define the rent you can expect for your rental property, check websites such as Craigslist, Zillow, or Trulia to find out the average rent in the area for similar properties.
You can use a mortgage calculator to get a rough idea of how much purchasing a specific investment property will cost you every month.
Work With A Honolulu Property Manager
One of the most common mistakes new real estate investors make is to try and do everything themselves. While you might think you’re saving money by managing your new property, hiring a Honolulu property manager can actually turn out to be more interesting from a financial perspective.
As an experienced and reliable Honolulu property management company, we always aim to maximize our clients’ ROI, saving them money and time.
Some of the things our team of Honolulu property managers will do for you include:
- Advising you on the right rental price
- Advertising your property
- Organizing viewings and check-in and check-out inspections
- Sourcing quality tenants
- Keeping your tenants happy and reducing your vacancy rate
- Handling complaints and maintenance issues
- Advising you on upgrades to maximize your returns
So, get in touch to find out how we can help. We’d love to have a chat!
If you’re looking to purchase a rental for the first time and generate cash flow, we’ve got plenty of other tips for you on our blog.