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When Will You Be Ready to Buy Your First Rental Property?

by Mark Ferguson on April 27, 2014 · 18 comments

  
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I am at a point now where I consider myself a successful real estate investor.  I still have many big goals and I am by no means done learning, but I have a good solid base.  I own 10 long-term rentals and I own 6 fix and flips with 4 more under contract.

However, it was not a quick journey to get where I am today.

I have been a licensed real estate agent since 2001 and I didn’t buy my first rental property until 2010.  There are many reasons it took me so long to buy a rental; money, ambition, priorities are a few of them.  How long does it take to get comfortable and become a successful investor?

Why Did it Take Me So Long to Invest?

I have been doing fix and flips since before I got my license in 2001, but I worked with my father on those flips up until September of 2013.  With the flips prior to September, I had very little, if any, of my own money invested and very little risk was involved.  I don’t count those flips as personal investments for myself.  Every since I started in real estate I wanted to be able to invest in rentals, not because I had done a lot of research on rental properties, but because my family invested in them and they seemed happy with the results.  I didn’t actually get serious about buying rental properties until 2007.  By serious I mean planning out how much money I would need, how I would get that money and researching why rental properties were a good investment.

I was ready to buy my first rental property in 2009; I had the money saved and I knew what I wanted.  Then my wife and I decided we wanted to buy a bigger and nicer house.  We found a great deal on a foreclosure and boom, there went all the money we had saved on the down payment for the house.  I saved up for another year and then we refinanced our house and I had enough money for a rental property.  This time I pulled the trigger and I bought a rental in December of 2010 more than three years after I really decided I would start buying rental properties.  The ultimate reason it took me so long to invest in rental properties was a lack of money for down payments.  I was not disciplined to save enough money and when I did save money, I gave into the temptation to purchase bigger and better things.  I still have that temptation, but I do my best to invest first!

Is it a Bad Thing to Wait Three Years to Buy a Rental Property?

Three years may seem like an eternity to many people, but it goes fast!

Those three years were extremely valuable to me, because I learned about the market and exactly what I wanted in a rental property.  I am a real estate agent and immersed in the market, but investing in rentals is a completely different game then selling houses or flipping.  Three years also allowed me to save more than enough for a rental property.  I could have bought something sooner if I would have jumped in the game right when enough for the down payment and repairs.

Stretching your limits is not a good way to start investing in rental properties.

I had more than enough for a down payment, repairs, an emergency fund; enough to feel secure if something went wrong.

Do You Have to Wait Three Years to Buy a Rental Property?

No, you can buy a rental property much quicker than I did.

You can save money faster, buy a cheaper property, use creative finance or convert the home you live in into a rental.  If you want to invest sooner make sure you are prepared for buying a property!  Make sure you have enough money and make sure you know what you are doing.  There are a lot of articles about analysis paralysis and I agree you have to take action to be successful.  There is also a fine line between taking planned, smart action and buying a property just to get in the game.  Remember there are many things an aspiring investor can do to take action before they actually buy a property.

How Do You Know When You are Ready?

It is tough to know when you are ready to buy, but here are a few tips.

1.  Do you have an emergency fund saved for your family?  A good figure would be 6 months of expenses.  Once you have an emergency fund and enough money to invest in a property you might be ready.

2.  Do you know your market and can you identify a great deal?  If you have to rely on your Realtor, your friends and the BiggerPockets Forum if the house you want is a good deal, you might not be ready.

3.  Do you know why you want to buy a rental property?  Have you mapped out how much money it will make you, what your cash on cash returns and cash flow will be?  Do you have a long term plan and know how many properties you want to buy?  If you are just buying a rental because you heard it is a good thing to do, you might not be ready.

4.  Do you have financing in place and ready to go when you find that great deal?  If you have not talked to a lender then you are definitely not ready.

Conclusion

This article is not a free pass for you to not take action.  You may not be ready to buy a house, but that doesn’t mean you should not be out looking at houses, talking to lenders or building a strategy.  If it takes you a long time to actually buy a house, don’t stress out about it, but don’t give up either.

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{ 18 comments… read them below or add one }

Sharon Tzib April 27, 2014 at 6:30 am

Thanks for sharing your story, Mark. I think it will resonate with a lot of people. I turned my first primary residence into a rental, but then it took me seven more years to buy any more. Some of it was lack of discipline, like you said, to save. Other reasons were fear of finding an out of state market (I was in N Calif and the days of cash flowing rentals were long gone) and not prioritizing, since I was very busy running a pool and spa company.

Once I really committed to doing it though, all the pieces started falling into place. You are right – having a goal is not enough – you need to have a plan too and then find the people to help you act on it. Take care.

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Mark Ferguson April 28, 2014 at 10:08 am

Thank you Sharon! It took me a year to buy my second rental. It is not a quick process.

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Mehran Kamari April 27, 2014 at 9:14 am

Great article Mark! As Sharon mentioned above, it resonates with me quite well. I put a hefty down payment on my primary residence in February 2012 and lacked the funds to acquire a rental after that. So I rented out my spare rooms and starting saving every dollar I could for a down payment on my first rental. It took me over a year (all of which I was on BP practically every day learning!), and I bought my first rental in April 2013!

I often wonder how things would’ve turned out if I stayed at my parents home and used all that down payment money to acquire rentals in early 2012. I feel like that 1 year spent learning was pivotal for giving me the understanding to hit the ground running in 2013 though. A great thing happened for me though! In 2013 my house appreciated significantly and I’ve been able to tap my primary with a HELOC for all the investing I’ve done so far. Lucky? Maybe!

I like that way you think and always enjoy your blog posts! Keep em coming!

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Mark Ferguson April 28, 2014 at 10:11 am

Thank you! It takes a long time to learn. It sounds like things have worked out very well.

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James Pratt April 27, 2014 at 10:31 am

When people ask me how to get started, I tell them to either go to work for a contractor or get a real estate license. This way they will learn hands on and gain a lot of experience. I did both and my real estate business blossomed. In my construction company, we rehabbed a lot of homes and learned many tricks of the trade. With my real estate license, learn how to buy, sell, finance and what types of properties to were most desirable.

The main point is, I GOT INVOLVED!

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Mark Ferguson April 28, 2014 at 10:13 am

Hi James, getting involved is the key. You don’t have to buy right away, but you need to do something!

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Armaity April 27, 2014 at 5:43 pm

Excellent article Mark (as were the other great articles you provided links for). Very helpful for investors like me waiting in the wings to start. Will look forward to reading all your Blog posts. Thanks again

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Mark Ferguson April 28, 2014 at 10:14 am

Thank you very much.

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Jordan April 27, 2014 at 6:56 pm

I really like your articles, it has a different take on the subject of investing. Thanks for another great article

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Mark Ferguson April 28, 2014 at 10:14 am

Thank you Jordan

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Trevor April 27, 2014 at 8:10 pm

Mark, the four fix and flips that you have under contract, where and how did you find them?

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Mark Ferguson April 28, 2014 at 10:15 am

They are in northern Colorado and I got them all off the MLS.

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Jacob F April 27, 2014 at 9:57 pm

Great article, Mark. I always enjoy your posts.

I definitely fall into the “buying a property just to get in the game” crowd. I don’t regret it, though because I am the type of guy who learns by doing. Of course, that type of education tends to be a bit more pricey.

Real estate is definitely helping develop my patience.

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Mark Ferguson April 28, 2014 at 10:16 am

Hi Jacob, that is a great attitude. I have learned a lot by doing as well.

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Clayton Brown April 28, 2014 at 9:57 pm

Thanks Mark for sharing your story. I completely understand and am very familiar with how you feel. One good thing about the market now is that there are more many companies offering turn-key rentals. This gives someone who doesn’t want to commit that much time (or money) the opportunity to get into real estate investing. It may not provide the best returns, but it certainly is another way to get started and be more active in real estate.

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mark ferguson May 1, 2014 at 10:32 am

Hi Clayton,
Very true, turn keys can be a great opportunity especially for those with crazy housing prices.

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Shaun May 3, 2014 at 11:40 am

Great points all around.
I’m glad you pointed out this is NOT a pass to not take action.
It is a good example of the delicate balance of being adequately prepared and just not overcoming fear and the safety net of “just learning a few more things”.

Never smart to rush in with no idea what you are doing, but once you have a foundation there is nothing that will teach you better and faster then getting out there and doing it!

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Mark Ferguson May 22, 2014 at 10:01 pm

Very true Shaun, There are many ways to take action without actually buying. You shouldn’t beat yourself up over taking your time, but at the same time you can’t use that as an excuse not to take action. It is a tricky balance.

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