Are you finally ready to take the plunge and buy your first investment property? Have you finally saved enough money to start investing in real estate, but don’t know where to begin? If so, you’re going to want to read these tips on what to buy and where to start to maximize your investment.
For most first-time investors, the choice is usually between a Single Family Home or a 2-4 unit property, commonly called Duplexes, Triplexes and Fourplexes. There are large differences between both and you should fully understand them before plunking your money down. In this segment we’re going to focus on Single Family Residences or SFRs for short.
SFRs provide an investor with the greatest leverage possible, meaning you can put the least money down. It’s not unusual to buy these types of deals with 10% down, meaning on a $150,000 home, you’ll only need to come up with $15,000 plus closing costs. This makes these types of investments very affordable for most young investors who don’t have a lot of capital to begin. Be prepared, however, to feed the alligator every month, because these properties typically don’t debt cover, which means the rent you collect every month probably won’t be enough to cover your mortgage payment, tax bill and any other expenses you have.
Most often these properties are purchased as pure speculation or appreciation plays, meaning the goal is to create equity over time. For example, if you bought a property for $150,000 with 10% down, and were able to resell it in 3 years for $175,000, you’d earn $25,000 on your $15,000 investment, which equates to a 167% ROI over a 3 year hold!
Not bad, but be careful when buying these types of deals, because your goal is to come as to close to breakeven as possible, so you don’t have to come out of pocket. And remember, if you’re tenant moves out for any reason, you won’t have any money that month to cover the mortgage or expenses, so make sure you have 3 months of mortgage payments in reserve for a rainy day.
And remember, the more SFR’s you own, the more tenants and properties you have to manage. It’s easier to own a 10-unit apartment building than 10 SFR’s since you only have 1 roof and 1 lawn to mow, versus 10 roofs and 10 lawns. Finally, as soon as you’re able, take your equity gains from the SFR’s and 1031 into properties with multiple units so you can begin your climb up the Property Ladder.
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