An investment property can range from a small condo rental all the way up to a skyscraper along the manhattan skyline – and everything in between. So how do you know the best kind of investment property for you? Furthermore, how do you get involved in this game that has made so many people wealthy in the history of civilization?
This article is going to give you a crash course in choosing the best investment properties, financing that purchase, and ultimately building serious wealth through real estate investing. For a more in-depth look at getting started investing in real estate, check out the free Ultimate Beginner’s Guide to Real Estate Investing eBook.
What Classifies a Good Investment Property?
Before getting into the specifics of how to find and fund your investment property, I want to first take a step back and look at exactly what defines a good investment property? Sure, you could go and purchase any piece of real estate, but a true investment property is one that helps you build wealth, often through multiple streams.
A single investment property typically offers several different avenues to build wealth:
- Appreciation: When property values rise, the difference between what you owe and what it’s worth will increase.
- Cash Flow: When a property is rented for income, and there is more income coming in each month than expenses going out.
- Tax Benefits: Owning investment properties can help offset income from other areas of your life (see your tax advisor for more information.)
- Principle Reduction: If you carry a loan on the investment property, each month your amount owed decreases slightly. For example, if you buy a single family home with a thirty year mortgage, after thirty years the loan would be paid off (with the help of the tenants’ monthly rent payments) and you’ll own the property free-and-clear.
Investment properties can utilize any of the above four avenues, but an ideal investment property will utilize all four. Also, different investment types will focus more or less on different avenues.
Choosing Your Ideal Investment Property
There are literally hundreds of ways to make money in real estate (seriously, check out this list) but as a property investor, you don’t need to do every one. In fact, it’s often best to focus on just one property type and become a professional in that niche before trying something new. A few of the more common investment types are:
- Single Family Homes
- Small Multifamily Properties (2-4 units)
- Apartment Complexes
- Commercial Buildings
- Mobile Homes
- And many, many more.
Finding The Perfect Property to Invest In
Once you’ve decided on the property type you want to invest in, the next step is searching that property out. There are numerous ways to find investment property, but the most common methods are:
The MLS, or Multiple Listing Service, is a collection of lists put together by local real estate agents that include all the homes currently for sale through an agent. In the old days, agents kept their listings in a file cabinet, but today you can search the MLS online, through multiple websites like Realtor.com, RedFin.com, Zillow.com, or Trulia.com. Buying a property through an MLS listing is as easy as finding a real estate agent you like (and trust) and letting them submit an offer for you. Typically, the MLS is used primarily for single family homes and small multifamily properties, though larger multifamily and commercial properties can sometimes be found as well.
Typically, if you are looking to buy commercial real estate, a commercial real estate broker will be a valuable member of your team. Often times, commercial brokers will have “pocket listings” which means deals that are not public knowledge. If commercial real estate is the niche you’ve chosen, definitely find a commercial broker you can trust.
Loopnet.com is the largest listing site for commercial and large multifamily properties. You can search for anything from a small apartment building to a office building or restaurant here.
Direct mail is the process of sending out a large number of letters or postcards to a targeted list of individuals, based on certain criteria. Lists can be obtained from many sources and may be cheaper than you think. Check out services like Click2Mail or PostCardMania to learn more specifics on pricing and options. You may send out 1000 letters and only hear back from 50 people – but if you can close just one deal, it can often be a great way to buy directly from an owner before a real estate agent gets involved. For a great summary of direct mail, see this article.
Finally, many individuals find their ideal investment property simply by networking. Whether through formal networking channels like investment clubs or simply through person to person contact in daily life, many deals are exchanged through personal connections. Be sure to have a professional business card on you at all times – you never know when you may need it.
Funding Your Purchase
You can easily fund your real estate purchases if you have the cash – but not everyone can simply do that. Additionally, those who can pay with all cash often choose not to, because they’d rather utilize the concept of “leverage” to control more property than an all-cash purchase would allow (for a great article on leverage, check out “To Leverage or Not to Leverage …This is the Question.“)This section is going to look at a few of the more common methods used to finance real estate.
- Bank Loans: If your credit and income are good, you can often fund your purchase through a bank, credit union, or mortgage broker. These rates are typically the lowest and are generally spread out over 15 to 30 years. Check out current mortgage rates by clicking here.
- Hard Money Lenders: If you only need the money for a short time (and plan to refinance or sell quickly,) hard money lenders can be a tool to use. Hard Money Lenders are short term lenders who look primarily at the deal, rather than the credit/income of the borrower. There are many risks and benefits to using hard money lenders, so be sure to research carefully. Be sure to check out the most recent BiggerPockets Podcast, where we interviewed a real hard money lender for almost an hour and learned a ton of great information. If you are looking for a hard money lender, be sure to check out the BiggerPockets Hard Money Lenders Directory.
- Private Money: With the low rates currently offered by most bank savings accounts and CDs, many wealthy individuals are turning to private lending to earn a higher rate. As an investor, you can often offer an individual a solid return, secured by real estate, to the individual and use the money to fund your deals. Private lenders are typically known to the borrower (perhaps a family member or friend.)
- Syndication: As you progress in your real estate investing, you may find the need for larger sums of money than you could hope to generate alone. In these cases, real estate syndications are often formed to pool the money from multiple investors into a fund to invest in real estate. There are many laws concerning the forming of a syndication, so be sure to check with both your state and federal laws and consult with an attorney before forming a syndication.
Managing Your Purchase
After purchasing your property, the fun is not over. In fact, the decisions you make and the steps your take after your purchase can make your investment a solid one or a dud. Typically, there are two main choices when it comes to managing your property:
- Self-Managed: Many investors begin by managing your own properties. As a landlord, it is your responsibility to collect rent, enforce the lease, advertise and sign with new tenants, prepare or arrange maintenance, do the bookwork, and perform any and all other tasks as they occur. However, while most landlords typically begin doing everything themselves, many individual tasks (like plumbing!) can actually be hired out to a professional for less than you think. To read more about becoming a landlord, check out the article “How to Be a Landlord: Top Ten Tips for Success.“
- Property Management: If you don’t want to manage your own property, there are thousands of professional property management companies out there that can manage for you. If you choose to hire a manager, don’t believe your investment is now 100% hands off though! Typically, your job becomes “managing the manger” and ensuring they are doing their job.
Your Next Steps
Buying an investment property is not a hobby – so don’t treat it like one. Real estate investing is a business like any other, in need of systems, plans, and effective handling to be successful. BiggerPockets exists to help investors create those systems and get the most out of their investments. As I spoke about last week in my article “The ONLY Step You Need to Get Moving in Your Real Estate Investing“, the most important step for YOU to take right now is the next step. Determine what needs to happen next – and make it happen. Perhaps that means signing up for BiggerPockets and jumping into the real estate forums to ask a question. Perhaps that means calling up your real estate agent and start looking at properties.
Whatever your next step is, I hope you’ll take BiggerPockets along for the ride and let us help you on your journey. Once you’ve built all the wealth you can dream of, we hope you continue to help answer questions of those just starting out. That’s what BiggerPockets is all about.
Now it’s your turn! What have a left out? What advice could you add? What questions do you have? Leave your comments below, share this article on your favorite social media channel, and let’s chat!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.