If you are looking to buy real estate as an investment and are thinking about making your first purchase a single-family home, you are looking in the right area of real estate. This is arguably the best type of property to invest in, at least for the first-time investor. However, there are many things you should know about this type of investment that will contribute to your success.
You should create an income producing property
You will want to place enough of a down payment and finance the balance of the property in a way that will create a mortgage payment lower than the rent your tenant is paying. In addition, you want the excess rent to be sufficient to cover property taxes, as well as repairs and upkeep of the property. What you want to avoid is being dependent on the appreciation of the home, especially if you're taking a second mortgage on your current home to buy your first investment property. This type of leverage can become a nightmare when the real estate market takes a downturn. Make sure you create an income producing property with your first investment.
You should buy an existing rental unit
It's usually easier to buy a home that is an existing rental house. One of the benefits to this is there may already be a tenant living there. You won't have to guess how much rent you can get for the property, and you may be able to estimate how much you may be able to raise the rent without losing your tenant. Of course, if there is an existing lease, you will have to honor it. The lease comes with the sale of the property. But if you make a good purchase, including a large enough down payment, you will have an instant positive cash flow.
You should Look for a neighborhood with only a few rental units
When a neighborhood consists of houses that are occupied by their owners, you will likely be able to get more in monthly rents. Neighborhoods with many rental houses may not have as high of a median value for the homes, and this means lower rents. The downside to this is that neighborhoods with a high percentage of home owners do not like seeing rental houses because they can bring down the property values or slow the appreciation of existing homes. So, you will need to make a commitment to keeping the property looking good, at least to the point where it cannot be distinguished from other houses. This will also attract potential tenants with higher incomes who will pay more rent to live in a nicer neighborhood.
Although a single-family home is the best way to make your first real estate investment, it is not automatically a successful investment. The three tips listed above will take much of the risk out of your purchase.