Chances are, you’re acquainted with someone linked to the real estate sector, aside from myself. Perhaps it’s an uncle, cousin, friend, or colleague who constantly boasts about their latest real estate conquest. Or maybe you know someone who tried their hand at real estate, lost their savings, and concluded it’s all a scheme to oppress the working class.
When I embarked on real estate investment, I encountered both optimists who urged me to dive in due to their own triumphs, and pessimists who cautioned me against an industry they deemed a financial sinkhole.
The reality lies somewhere in between. While acquiring your initial investment property isn’t an effortless shortcut to wealth, with dedication and effort, success is within reach.
Over the past five years, my spouse and I have accumulated a modest collection of rental properties, buying and selling several in the process. With judicious purchases, it’s usually difficult to incur losses on rental properties—yet we’ve had our share of setbacks, which I’ll share later.
The anticipation of our first rental property purchase led to many restless nights, filled with worst-case scenarios. But ultimately, we felt ready, having meticulously researched, crunched the numbers, and weighed every risk.
If you’ve ever considered entering real estate but hesitated due to fear or uncertainty, this guide is tailored for you. I’ll outline the steps we took from the onset of our property search, empowering you with the knowledge to begin your own venture.
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Network with Experienced Investors Achieving any goal begins with the right mindset.
Jim Rohn famously stated that we are the average of the five people we spend the most time with. Surrounding yourself with successful real estate investors is crucial if you’re aiming for success—even with modest property aspirations.
Much of real estate investing expertise comes from hands-on experience, and learning from others’ experiences is less costly than making your own mistakes.Real estate investors typically relish sharing their successes and failures. At my first real estate meetup, a single question led to an hour-long narrative of someone’s investment history.
No matter your location, there’s likely a Real Estate Investor Association (REIA) nearby. Meetup.com alone lists over 5,000 real estate groups.
For introverts like myself, Biggerpockets.com is a valuable resource—an extensive online community of investors offering a wealth of educational content that bolstered my confidence before I ventured into real estate.
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Define Your Buying Criteria Learning
about rental properties should lead you to establish what you’re specifically looking for since not all properties are suitable rentals. Setting your criteria saves time by filtering out non-viable prospects.
Two heuristics have been particularly helpful for me:
- The 50% Rule suggests that about half of your rental income will cover expenses, excluding the mortgage.
- The 1% Rule indicates that a property’s monthly rent should be at least 1% of the total purchase price to ensure profitability.
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Be Comfortable with Your Criteria
While these heuristics serve as a good starting point, ultimately, you must decide on your own criteria based on your goals and comfort level.
Some considerations might include:- Type of property you’re seeking (turnkey or fixer-upper)
- Property class and potential challenges
- Whether you’ll manage the property yourself
- Your available down payment, which influences your purchasing power
When I bought my first rental, I aimed for a 20% market discount and a minimum 10%.
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Embrace the “Driving for Dollars” Approach
The most lucrative deals are often found when you’re willing to roll up your sleeves and explore. “Driving for dollars” is exactly as it sounds—scouting neighborhoods for potential investment opportunities.
Choose an area where you’d like to buy a rental property and meticulously scan the streets for signs of neglect such as overgrown lawns, visible disrepair, or seemingly vacant properties. These homes are prime candidates for investor offers as they may require too much work to fetch full market price if listed.
Jot down addresses and reach out with a personalized letter, expressing your interest in purchasing a house in the area. Or, if you’re feeling bold, knock on the door or inquire with neighbors about the property’s status.
Real estate is fundamentally a relationship-driven business. Some of my most advantageous deals have stemmed from establishing sincere connections with sellers.
For instance, one of my best purchases was from a seller I kept in touch with for over a year. Despite receiving higher offers, he chose me because I showed genuine concern for his situation and consistently followed up with him.
Pro Tip: For those willing to invest time and effort to gain significant equity at a discount, “driving for dollars” and connecting directly with sellers is my top recommendation.
Case Study: Insights from My First Investment Property Acquisition
Beyond the technical advice, I want to share the journey to my first rental property. While how-tos are helpful, it’s often the success stories of others that truly inspire.
Real estate investment has driven much of our net worth increase in the last five years, but it hasn’t been without challenges. It’s not entirely passive income, and your underlying motivation is crucial to persevere through tough times.
Before securing our first property, I had spent over a year absorbing knowledge and networking on BiggerPockets. I reached out to a realtor who had assisted in buying our personal home, and after defining my buying criteria, I asked him to set up a search.
I reviewed countless listings and made several offers before stumbling upon a duplex. It was a foreclosure owned by the bank, with one tenant in place and the other side in need of significant repair—ideal for an investor.
I estimated a $30-40,000 renovation cost for the vacant unit. The occupied side was generating $900 in rent, and I projected $1,100 for the renovated unit. Our $130,000 offer was accepted, looking to outperform the 1% rule and promising some cash flow.
This property became an unexpected training ground, with the rent from the existing tenant covering the mortgage as we revamped the other side.
However, my initial cost projections fell short, the renovation dragged on, and a contractor absconded with $15,000 of our funds.
Despite these setbacks, the experience was invaluable, teaching me about cost estimation and contractor management. Consider it an investment in my real estate education, which has since paid off considerably.
Five years on, I still own the duplex, now valued at over double the purchase price and consistently cash flowing. The tenant that came with the property remains one of my best.
Wrap-up: It’s Time to Act!
It took me a year to purchase my first rental after deciding to invest. While research and education are vital, there comes a time to take the plunge.