Ultimate Guide to Buying Your First Investment Property: The Do’s, Don’ts, and What-ifs
So you’ve decided to take the plunge and start house flipping. In spite of what you’ve seen on popular reality TV shows, you know—or have heard—that the process is much more involved and complicated than anyone on camera would ever let on. Still, the prospect of quitting your corporate job to pursue a career you’ll love is somehow less daunting than the alternative of ten more years without any more upward career mobility. But, before you jump in head first, you’d like to have a comprehensive guide to buying your first investment property. Well, you’re in luck because that’s just what you’ll find here!
A Step-By-Step Guide to Buying Your First Investment Property
Make no mistake. There’s no easy way to start buying, renovating, and selling houses without a lot of hard work and a solid team behind you. But, even as a new investor, you can set yourself up for success by developing the skills, knowledge, and a network that will drive your business forward from your very first purchase. The process of buying that first great investment property, however, begins before you sign on the dotted line. So, let’s take a look at what you should and shouldn’t do to improve your chances of achieving your goals right out of the gate.
Find a property.
There are a number of ways to find motivated sellers and most real estate investors have tried them all with varying degrees of success. Your options include purchasing lead lists, visiting onsite and online auctions, applying to local city or county land bank programs, knocking on doors, and driving for dollars. With many of these options, however, competition is strong. Lead lists, for example, are often sold by various vendors to investors who are interested in buying cheap properties. So, if you market to distressed homeowners on these lists, chances are so has everyone else. Walking or driving neighborhoods in search of FSBOs, vacant and abandoned properties, or homes fallen into disrepair, present their own problems as well. Aside from the time it’ll take you to find a property this way, you could end up spinning your wheels trying to locate them in the first place or, when you find them, involved in emotional negotiations.
The easiest way to find investment properties, by far, is to have a real estate investor lead generation system in place that brings sellers to you.
When you’ve found a fixer-upper home for sale, put your best offer forward. Your best, however, might not be the highest—if you’ve done your homework. But that’s not necessarily an obstacle to getting the property. Too often, when there’s competition among buyers, the price gets driven up and eats into available funds for the rehab or the ROI when selling at market value after repairs. Sometimes, homeowners will hold tight to a price after looking up their property’s value online. These online estimates, however, don’t reflect a home’s rundown condition and cost of repairs. Inexperienced real estate investors, then, end up either paying too much or backing out when they realize their offer is too high. As a savvy investor, you’ll want to sidestep these scenarios if possible.
So, to start, compare the property with comparable homes in the area to determine a fair market value for its size and condition, then consider these results carefully when making an offer. It’s important that you don’t fall into the trap of overbidding, then overpaying, on a house that’ll sink any chance of seeing returns once it’s rehabbed and back on the market.
On the flip side, there’s no need to lowball the seller with an offer that is so far below market value that you insult them or get laughed out the door. Your goal is to win the seller over and pay a fair below-market price that allows you to realize reasonable returns. Making a wisely calculated offer is pivotal to establishing trust with the homeowner and getting your offer accepted. Having the right real estate investment analysis and valuation tool, like ValueChek®, to help you crunch the numbers helps in this regard.
Part of doing homework on a property includes getting a home inspection. In some cases, you can have a property inspected before making an offer and, in others, after you’ve been accepted. Under certain conditions–if there is a lot of competition, for example, you’ll find that homeowners will want to skip inspections entirely. This is not advised. So when you do perform an inspection, whether it’s before submitting your offer or after acceptance, hire a licensed pro to handle it. If the situation warrants, get multiple professionals to examine individual systems such as electrical, plumbing, and heating and cooling. This step should not be skipped for any reason—not even to win the bid—because of its role in validating your offer.
See, the way that home inspections work is twofold. First, they may uncover prohibitively expensive repairs, saving you from buying what could turn into a money pit. Second, they provide you with an accurate estimate of renovation costs, which is crucial to buying and selling at a price that leaves room for realizing a return on your investment. Even if the house looks like it could be a quick and easy lipstick rehab, it’s better to know for sure before you close the deal. If you can’t buy at a price that makes sense, you shouldn’t buy at all.
Do hire experts.
You’re a professional who’s got a lot of work to do in a limited amount of time, so make life easier by hiring experts who work as hard as you do. The amount of time it typically takes for buying and renovating a property is between six and 12 months. You’ll want to strive to complete your project within this timeframe, too, to take advantage of current market conditions, avoid the accrual of loan penalties or fees, and to keep the cost of materials and labor under control. In order to do this, you’ll need a whole team of professionals on your side.
Whenever you can, assemble this team before putting in an offer. Once you get accepted, it’s go-time. Whether doing a straightforward bathroom and kitchen renovation on your investment property or giving it a complete makeover from floor to ceiling, the people you choose to help you matter, both to your budget and your bottom line. Always check credentials, even if an expert comes highly recommended. This applies to hiring a real estate agent as well. When you’re ready to sell your property, you’ll want someone who knows the market and has experience working with investors.
Insure your investment.
An often overlooked step, buying vacant property insurance for flipping houses is as important to your ROI as any other decision you might make. Both during the renovation and when the house is on the market, disaster can strike your property and inflict the kind of damage that’s hard, even impossible, to recover from. When unexpected events, like vandalism and flooding happen, your best defense is to have an investor-specific insurance policy—not a homeowner policy—in place. This helps you recoup costs in order to recover your investment and get back on track with the renovation or sale.
To this end, it’s essential to understand the distinction between the different types of policies and what they do or do not cover. If you don’t get the right policy, or the right amount of coverage, you run the risk of having your claims denied and of losing all the time and money you’ve invested. Having the wrong insurance is almost as bad as having none at all. Again, here’s where it’s crucial to rely on an expert to reliably point you in the right direction.
Market your property.
Once the rehab is finished, make a concerted effort to market your property to sell. You might think this is a no-brainer, but you’d be surprised at how often novice investors drop the ball on this last, yet critical, step. First, decide on the demographic you’re marketing to. Do you want to attract families or singles, Millennials or Gen Xers? Then, stage your home for a quick sale to your chosen demographic. Staging helps to ensure you are presenting the best-looking house on the block for the price. It’s equally important to list the house at a price that is low enough to be competitive in the area yet high enough to bring solid returns when sold.
As for getting the most attention from potential homebuyers, your best bet is working with a real estate agent who’s already experienced with advertising, holding open houses, and networking with other agents and buyers. And, do not market your property until renovations are done. Assuming you bought at the right price and rehabbed at or under budget, there’s no reason to get ahead of yourself trying to sell a house before it’s ready. It’s an amateur move and, often, one that turns off more buyers than not.
The Misstep to Avoid When Buying Investment Property
Each of these steps gets you closer to seeing potential returns with your first real estate investment opportunity, so none should be overlooked. Even as you gain experience and investing becomes second nature, you’ll find these steps are key components for building your portfolio and your reputation as a professional. They’ll keep you from making costly mistakes and sabotaging professional relationships, as well as give you the chance to learn how to handle challenges that might scare other, less informed investors away.
Surprise! Stuff Still Happens.
But what if you’ve done all you’re supposed to do to ensure the project goes as smoothly as possible and something still happens–like inclement weather, contractual disputes, or construction mistakes–that throws a wrench in your rehab plans and, potentially, your profits? Every property is unique, after all, as are the myriad problems and pitfalls that can sometimes arise. This can make it difficult to predict what you might encounter on your first, fifth, or fifteenth investment. This is also why it’s critical to have access to more experienced investors or a mentor, like a HomeVestors® Development Agent, who can help you navigate surprises and help to solve any problems the moment they arise.
Because, the truth is, there will always be challenges and opportunities to overcome them. The learning never stops. So having the right training and ongoing support, in addition to a comprehensive guide to real estate investing, can get you started on the right foot–and keep you there.
Get the Right Guidance Every Step of the Way
Independently owned and operated HomeVestors® franchisees not only receive step-by-step guidance in real estate investing during their week-long initial training, they also get support throughout the life of their franchise. Development Agents, who are successful real estate investors themselves, provide one-on-one mentoring for every new investor who comes on board to help assist in smoothing out those inevitable bumps in the road that all investors face. Additionally, franchisees have access to a regional network of other HomeVestors® franchisees when they need cheering on or have questions about local resources. It’s a support system that makes buying and renovating a property easier.
Joining the “We Buy Ugly Houses”® team is a great step toward confidently buying your first investment property. When you’re ready to take that step, let HomeVestors guide the way.
Each franchise is independently owned and operated