Recap and Free Cheat Sheet
This is the recap and cheat sheet for our free guide on How To Buy Your First Investment Property.
We've covered a lot together. Below you'll find the key takeaways.
How Real Estate Builds Wealth
- Real estate opens up the door to tax advantages and tax write-offs that many don't have access to: deductions, depreciation, and the 1031 exchange. This allows you to save potentially hundreds of thousands of dollars over a working career.
- Real estate appreciates over time. Conservatively, that number looks like 3% annually. In growing locales, you can get much more than that!
- Leverage allows you to use borrowed money to earn growth on the total home price (i.e. $150,000) but only putting in 20% (i.e. $30,000). This amplifies all returns.
- Real estate allows not only for appreciation, but also cash flow — money that goes straight into your bank account each month from rental income.
- Overtime, tenants in your rental property pay for your mortgage, which in turn builds equity in the house over time for you.
How To Find Properties
- Understand what you are looking for as an investor. Some investors are more adventurous with larger renovations for a higher payout. Other investors might prefer more cashflow to appreciation. It's up to you!
- Learn about the markets you want to invest in. Is there better appreciation for the area? Are the neighborhoods good? Is there commercial property nearby?
- Explore areas! Local areas are often best since you are familiar unless you go with a company-offered solution that you trust.
- Explore the internet. Most public data is aggregated on large websites to give you up-to-date information on homes.
- Connect with professionals, real estate investing clubs, and wholesalers who might be able to point you to good deals that don't fit their own buy box.
How To Tell If A Real Estate Deal Is Good Or Not
- Get the pro-forma! Pro-Formas are always going to be the first step in looking at the financial aspect of an investment home. The selling agent should be able to provide this information to you as a potential buyer.
- Understand the vocabulary and what the numbers mean on a pro-forma. They're key to valuing the home.
- Figure out what the income, potential vacancy rate, other potential income, and expenses of the property. These numbers can tell you if the deal can be improved further.
- Create an action item list. Figure out if you can improve the property with a positive return. Then figure out the numbers with those improvements in mind. This will serve as a north star.
How To Make A Good Real Estate Offer
- You'll need to decide if you want to keep the property in your name or in another legal entity. You'll need to weigh the pros and cons of creating a separate entity for your investment property.
- You'll need to include a few line items: Earnest Money Deposit, Financing, Maintenance Warranty, and Legal Description of the property in your offer.
- Make sure you have the necessary contingencies in place to protect yourself. This is to force a seller to promise and guarantee that certain items are met.
- Once you submit your offer, the seller has 3 options: accept, reject, or counter offer. Almost always, a seller will counter offer, which means you'll need to negotiate with the seller by adding an addendum or changing the terms of the contract.
- You and the seller have agreed to favorable terms for the both of you. Now you are under contract and you enter the due diligence stage. This means that this is the point you can examine the property in-person and with professionals. There are two primary pieces of this stage: inspection and appraisal.
How To Finance A Real Estate Deal
- Leverage is one of the few tools not normally available for stocks and bonds. In simple terms, leverage is the ability to use borrowed money (e.g. your mortgage loan) to expand a person's asset base. This typically increases the potential return of the investment and amplifies returns.
- You have the conventional routes (15 or 30 year mortgages). The advantage of this loan is the ability to pay it off slowly over time which increases the amount of cash flow a property will have. It also allows you to pay off the loan quicker if that is your desired outcome without penalty. With the 15-year, the monthly expense increases greatly, but you pay less interest.
- If you can live in the property first, you can use government sponsored loans. There are a lot of rules to these so you'll probably want a specialized professional to guide you through.
- You can do private lending. This means that you borrow from private individuals or groups (i.e. friends, family, private investors, or more). There are more legal pitfalls with this.
- Mortgage lenders use income, credit, and collateral to determine if you are worthy for a loan.
How To Close A Real Estate Deal
- Before closing, you'll want to have an agent, set a closing date, ensure your financing has been approved, get homeowners insurance, check closing costs, and do your final due diligence.
- There are a lot of typical closing costs outlined in the article. The typical closing costs vary from locale to locale. You should budget around 5% of the purchase price towards the closing costs, but this is just a general rule of thumb. This means that an investment property purchase requires around 25% of the home purchase price in order to cover the entire transaction because of the downpayment.
How To Hire A Property Management Company
- A property management company is a company that provides a service to real estate owners usually in its operation, ongoing maintenance, and oversight.
- Property management companies often do all of the work necessary to make sure your investment home is rent-ready and rented. By doing all of this means that you as the investment homeowner can sit back and relax. This means passive income for you! The last advantage has to do with taxes. In most cases, property management fees are generally tax-deductible expenses for your property.
- Property management companies have a conflict of interest due to their fee structure (setup fees, leasing fees, advertising fees, and lease renewal fees).
- Make sure to vet your property management company by reading reviews to hear from actual customers. Understand any markups and fees from their services.
Becoming A Doorvestor
- 5-steps
- Get started by answering a questionnaire about your ideal home
- Put down a $1k fully-refundable deposit
- Reserve your ideal home
- Close on your home with Doorvest with our dedicated Transactions Coordinator
- Sit back and enjoy the benefits
- You get the benefit of real estate investing paired with the benefit of technology. That's Doorvest, the way real estate investing should be. Plus, you'll have a dedicated client advisor to guide you along the way to your path to buying your 1st (or 10th) investment property.
Next Steps
Decided to move forward on investing in real estate? More specifically, are you interested in long-term residential real estate investments?
Doorvest is on a mission to democratize the path to financial independence for the next generation. We help you own a home, generate passive income, build long-term wealth, accumulate tax breaks, all for as little as $35k.
To make it even sweeter, Doorvest offers guaranteed quality renovations, rental income for the first year, and secure online transactions and processes!