Bad tenants, large maintenance bills, and insurance claims all piled up to over $90k in damages on my first investment property. It was not what I had planned.
When I started real estate investing, I went straight for the deals where the numbers crunched out perfectly. But, I soon learned numbers weren’t the only consideration.
Picking your first investment property can be a daunting task. I felt exactly like this when I bought my first investment property eight years ago. However, if you start by taking the time to build a solid foundation of knowledge, you’ll be ahead of many people who dive into real estate investing, including me.
After eight years in the trenches, I’ve learned a few things about choosing the right real estate investment. So, to help you, here’s five awesome tips on how to pick your first investment property.
1. Discover Your Motivation
No matter how knowledgeable or prepared you are, you will face challenging situations in your path through real estate investing. So, you need to understand why you are acquiring brick and mortar assets filled with tenants. Really knowing why you’re doing it will propel you through any sticky challenges and motivate you to continue investing. Also, knowing why you’re investing in real estate will guide your decisions, including what you are looking for in your first property.
Ask yourself “what is my motivation for becoming a real estate investor?” and “what do I want to achieve by investing in real estate?” Typically, I hear people say they are investing in real estate to achieve “financial freedom”, to retire early and comfortably, or to gain financial flexibility (i.e. a contingency plan). However, these are pretty broad responses without a clear reason why. To help refine this this response, I like to use a method known as The 5 Whys: simply ask yourself “why?” after each response, at least five times, or until you reach clarity. For example:
Whatever your reasons may be, once they have been clarified in your mind you can ask yourself at each decision point if that decision will bring you closer or further away from that envisioned goal.
Bottom line — clarify your motivation and goals before you begin investing in real estate.
2. What Financial Resources Do You Have?
Many novice investors jump straight into deals because it looks cheap and the potential rental income looks great, but they only worry about finding money after the property is conditionally sold. If financing falls through, not only do you risk losing an awesome deal, but also your credibility as an investor. I encourage you to sort out your finances beforehand and come up with a budget for your investment property. Ask yourself:
• How much can I afford?
• Am I pre-qualified for financing and are the terms in my favor?
• Do I have investment capital or do I need to seek joint venture partners?
• Are my personal finances in order so that I have access to contingency funds to cover unexpected expenses?
Work with a professional like a mortgage broker who caters to real estate investors to find out the best financial options for you. You should also read how to finance you real estate investments.
Bottom line — clarify your finances. What financing terms can you get and what can you afford?
3. What Kind of Property Should You Invest In?
When I bought my first investment property, I jumped into a triplex because the numbers look great and it was in a nice location. However, the triplex was high maintenance and I grossly under estimated the amount of time need to manage and renovate the property. I quickly realized that small multi-family units were not an ideal investment strategy for me.
How do you figure out what you should invest in? Here’s some questions to ask yourself:
- How much time can I dedicate to real estate investing now and in the next couple of years? Even with a property manager, some properties require more frequent care and attention than others.
- Can I handle renovating the investment property? You can find hidden opportunities by looking for a property that needs work. But if that’s not your thing, look for something turnkey (the work is already done), or budget for contractors to do the renovation.
- What kind of tenants do I want to attract? Students, young couples, subsidized income, high income, … Each home and location will attract a particular type of tenant. Which can you most easily deal with?
- Do I want freehold or condominium? There are benefits to both. However, if you want full control to modify your property and maximize its benefit, freehold is the preferred choice.
There are hundreds of ways to invest in real estate, so find the property that best fits your time availability and lifestyle. And, you may not get it right with the first one, but you have a better chance of finding the right strategy for you if you think about this first.
Bottom line — identify the lifestyle you want to live and the type of people you want to deal with while holding these investments. With this in mind, you can narrow down your ideal investment strategy. And, if you’re struggling, you should also check out this article on the 7 Ways to be a Mediocre Real Estate Investor.
4. Research Your Market and Define Your Target Areas:
Despite any reading or training you take prior to purchasing your first investment property, it will be a learning experience. And, for that reason, I recommend keeping your first investment close to home, i.e. either in your city, or a neighboring one that you know well. By keeping it close to home, you will be familiar with the area, and you will be able to easily take charge should anything not go according to plan.
To maximize your investment, I encourage looking for these factors in a particular neighborhood in your city:
• Population growth greater than the surrounding area average;
• Investments in infrastructure and transportation;
• Sustainable and diverse job growth;
• Low vacancy rates (<3%); and,
• Strong housing demand.
Julie and Dave have their Properties with a Cause Model which is similar. All of these factors in a neighbourhood encourages housing demand, giving you the largest probability of a nice return on investment.
Bottom line — research your market and define your target areas that will give you the greatest probability of success and a nice return. Remember to align this with your motivation and investment strategy.
5. What are Your Investment Rules?
Create rules to eliminate second-guessing and help you focus on finding your ideal first investment property. Rules may include features that a property must or must not have that could positively, or negatively, impact rental income and your lifestyle. Ask yourself:
- What is the minimum cash flow I need to feel comfortable with the property?
- How long do I want to hold the property?
- How far am I willing to drive to the property?
- What features in a property do I want to avoid (e.g., electric heat, low ceilings, condo fees, oil tanks)?
The previous four tips will help you define these questions. As you gain experience, you’ll have more and more investment rules.
Bottom line — develop your own rules to keep you focused when screening through deals and to help you gain confidence in your decision making when you pick your first investment property.
Take the time to build the right foundation rather than jumping into deals or only focusing on returns. If you follow all of these steps diligently, you will be ahead of most new real estate investors out there, you will fast track your process, and you will gain confidence in picking your first investment property!
Tracy Ma is a mother of twins, mentor, engineer, and real estate investor in Ottawa, Ontario. Connect with her at her website www.financialnirvanamama.com where she shares free tools, videos and articles on managing your real estate portfolio. Her mission is to empower women on investing to reach their financial nirvana.
Still want some advice? Julie has an entire stream of videos dedicated to getting started in real estate, including this one:
You might also like to check out these articles:
>> How to Be the Smartest Real Estate Investor
>> How to Become a Full Time Real Estate Investor
>> In Pursuit of Passive Income – The Passive Income Myth
>> 5 Steps to Rent Out Your Property
>> How to Find a Great Real Estate Agent to Work With as an Investor
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