What Should Your First Real Estate Investment Be?
Real estate investing can seem somewhat of an elusive wealth-building strategy. We see people posting all the time about how they flipped this house or how they're living the passive income lifestyle due to their rental properties. While it may all have seemed too good to be true at first, it's likely you're considering what could happen if you test out the waters of real estate investing.
The truth is that real estate investing is a doable strategy for anyone who has the propensity to learn. If you've invested some time and energy into reading up about real estate investing, you've likely come across many different strategies. From investing in single-family homes to commercial apartment buildings, there are many options.
At first, it can feel extremely overwhelming. Many of us go into a state of analysis paralysis. We constantly study the different strategies and find ourselves incapable of taking the next step. This is simply because we're so overloaded with information that we don't know what our next step is.
Narrow Down Your Options
While you may want to be a master of everything real estate, that only comes with time. And, some of the wealthiest people in the real estate sector are actually those who practice the same investment strategy over and over again. It's very rare that you find investors who have a plethora of different investments, such as single-family homes, duplexes, commercial apartment buildings, and so forth.
To assist you in getting started in the right sector of real estate investing, there are a few different factors you'll need to consider. These include:
- Your Interests
- Your Available Capital
- Your End Goals
Before you dive in, start with identifying these three things. When you have a clear idea of what each one is, you can easily make the right decision about what type of investment strategy you should pursue.
What Are Your Goals?
Each of us goes into real estate investing with different goals. Your goal may be to acquire passive income that you can enjoy living off of throughout your retirement years. My goal may be to generate capital quickly. Since we have different end goals, we'll be using different real estate investment strategies to get us there.
Take a few moments and determine why you want to invest in real estate and what your ultimate end goals are. Write them out on a piece of paper or save them in a folder on your computer where you can easily access these goals. Once you have these clearly written out, you can refer back to them to ensure that every decision you're making brings you closer to your end goals.
How Much Capital Do You Have Available For Investing?
Capital is going to make a big difference in the possibilities that are available to you. Putting things in retrospect, it's going to be difficult to afford an apartment complex if you only have $10,000 in available capital. This is because most lenders require between 20 and 25 percent of the purchase price to be paid for in advance in the form of a down payment.
While it's very true that properties vary widely in cost depending on the specific type of their geographical location, it's important to start out with a fair idea of what you can actually afford. Take a few moments and take a look at what capital is available to you. This could be in the form of savings, retirement accounts, or equity in your primary residence. Write down this number and where each part of it is coming from.
A Few Considerations For Different Capital Amounts
While your ultimate decision of what your first real estate investment property will be is up to you, we're going to share with you some common routes to take. To make this a bit easier, we're going to break down potential first investments based on the capital that you have at your disposal.
Less Than $10,000 (You Don't Own A Home)
One of the easiest forms of real estate investing to get into is purchasing a multi-family residence. These typically come in the form of duplexes and triplexes. Those who don't already own a primary residence can purchase a new 2, 3, or 4-unit home. While these may not be your dream home, they can be a great first investment to get capital rolling in.
The major benefit to this type of investment is that you can take out a primary mortgage on the property instead of an investment property loan. A mortgage for a primary residence requires a lower down payment amount than an investment property mortgage.
As a first-time homebuyer, you may even find that you can purchase a home for as little as three to five percent down. That means you only have to pay about $3,000 to $5,000 for the purchase of a $100,000 property. Compare that to an investment property where you have to spend $20,000 to $25,000 on a down payment for the same $100,000 property.
Less Than $10,000 (You Own A Home)
If you already own your primary residence, you're not likely eligible for purchasing properties with a low down payment. Unfortunately, $10,000 isn't typically enough to cover the down payment on a rental property. In this case, there is another strategy that you can implement.
They're called real estate investment trusts or REITs for short. These provide investors with access to a plethora of investment options ranging from single-family homes to apartment complexes. With this type of investment, one purchases a share or REIT in a property. So, instead of purchasing the property and owning 100 percent of it, you may own 25 percent. Each REIT investment amount and percentage of ownership is going to vary greatly.
$10,000 – $20,000
Starting out with this amount of money requires careful planning to ensure your first investment goes well. It's a good idea to plan a fix and flip to generate much-needed capital for future purchases. Fix and flips, also referred to as rehabs, are where you purchase a home, fix it up, and sell it.
These types of investments allow for large capital gains if the after-repair value is properly predicted. This strategy is one of the most popular on the market today as it provides a very lucrative return on investment when done right. However, it does require a lot more research and learning on the part of the investor.
Over $20,000
If you're dealing with a sizeable amount of capital, you should consider turning your efforts towards purchasing a multi-unit investment. While these come at a higher upfront cost, they tend to provide higher returns. In addition, multi-units help to mitigate the risk of your investment by having multiple tenants.
If your tenant in a single-family residence doesn't pay rent, you have no cash flow coming in. You still have to deal with covering the cost of the mortgage payment for that month. However, with your multi-unit, it's very unlikely that all of your tenants don't pay rent. While one or two may not, you'll likely still have some cash flow coming in to cover the cost of your mortgage payment.
Investing in real estate can be a great wealth-building strategy for anyone. However, selecting the right strategy is imperative to your success. It's best to start by narrowing down your strategy depending on the amount of money you have to invest. As you acquire more capital over time, you may find that you move onto other types of investment strategies.