What Advice Would You Give to First-Time Real Estate Investors?
To guide first-time real estate investors, we asked mortgage brokers and owners for their best advice. From securing mortgage pre-approval to preparing for property costs, here are six essential tips these professionals shared to help you make informed investment decisions.
- Secure Mortgage Pre-Approval
- Build a Team of Professionals
- Research the Local Market
- Analyze Market and Financing Options
- Avoid Performance Procrastination
- Prepare for Property Costs
Secure Mortgage Pre-Approval
One key piece of advice for first-time real estate investors is to secure a mortgage pre-approval before starting their property search. This provides financial clarity, helping them focus on properties within their budget and saving time. A pre-approval also makes them a more attractive buyer in a competitive market, potentially giving them an edge over others. Additionally, it can lock in an interest rate, protecting them from potential rate hikes during their search. Understanding their financing options through pre-approval helps them plan for all associated costs and choose the best mortgage product for their investment goals. This proactive step not only streamlines the property search but also positions them for a successful investment.
Build a Team of Professionals
For those looking to invest in real estate for the first time, it is critical to build a team of trusted professionals around you that have experience investing in real estate themselves. Your team should include a mortgage broker, realtor, home inspector, insurance broker, property manager, accountant, handyman/contractor, plumber, electrician, and appliance repair technician, to name some. Your team should be able to guide and support you with knowledge and information around economic fundamentals, cash-flow analysis, market conditions, and tenant profile.
Being an investor myself since 2003 and as a mortgage broker, I support my investor clients by sharing my knowledge, experience, and team of trusted professionals that will also support them. I want to ensure they are making informed decisions that will enable them to create a financial life by design rather than by accident, and through this, I am able to fulfill my purpose that 'All People Are Living a Life of Opportunity.'
Research the Local Market
I often advise first-time real estate investors to do thorough research of the local market, as it is very important to understand factors like average rental rates, vacancy levels, property values, and economic trends in the area.
Once, I worked with a client interested in investing in a college town. I advised him to look closely at the rental market, as student housing has a high turnover with unique risks. After analyzing the data, we found that while rents were high, vacancy rates spiked between semesters. This helped him make an informed decision about the right type of property to target in that market.
Thus, I suggest that all first-time investors take the time to understand numbers and market conditions or trends before investing.
Analyze Market and Financing Options
As a mortgage professional, one piece of advice I always give to first-time real estate investors is to thoroughly research and understand the market before making any commitments. It's essential to analyze factors like location, property values, and rental demand to ensure a sound investment. Additionally, I encourage clients to consult with financial advisors to understand their financing options and potential returns, which can help them make informed decisions and build a solid foundation for their investment journey.
Avoid Performance Procrastination
One piece of advice I've given to a client looking to invest in real estate for the first time is to just buy the property. Staying on the sidelines, waiting for rates to lower or the next home-run deal, is simply performance procrastination and has always yielded a zero-percent return.
Prepare for Property Costs
The biggest thing I ask is, have they considered how they are going to pay for the property costs if, for some reason, the rent wasn't coming in on it? I was taught and have found out on my own that six months of reserves is a great buffer to have. This number is great because it acts in two capacities:
1. If you don't have a tenant paying for a couple of months or more until you can get them out or caught up, you will be covered and making decisions based more on logic than desperation.
2. Six months in most markets will also cover most maintenance, repairs, or out-of-pocket expenses except for the big ones like a new roof.
The last thing I want them to experience, if possible, is deciding if they are going to make their home payment or the rental home payment this month.
