This Is What Your First Real Estate Investment Should Be – Motley Fool

Posted: November 3, 2020 at 4:54 pm

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Getting your start in real estate investing can be extremely intimidating. There are so many investment options to choose from, and since every investor is starting from a different place with different financial goals and interests, there isn't always a clear direction on where to start. Rather than figuring it out on your own, below are a few different scenarios to help you determine what your first real estate investment should be based on your interests, available capital, and end goals.

The type of investment you target will depend on what your goal is for investing in real estate. Are you looking for passive income or are you looking to generate capital quickly? Both can serve you well and be achieved by the type of investment you target will differ based on your desires.

Consider how much money you have available to invest. Most lenders will require a 20% down payment or more when purchasing an investment property, which means for a $100,000 property you would need a minimum of $20,000. If the property needs repairs or improvements, your capital investment just went up. If you only have $5,000 to $10,000 to invest, your options are limited when compared to those who have $25,000 or more.

It's also important to consider where you're located. If you're in a market that's expensive or highly competitive, $10,000 or $20,000 may not go far. In that case, consider looking just outside your target market. Many rural or suburban areas next to the major metros will have more opportunity and lower real estate prices. Having an investment in your backyard definitely makes it easier at times, but it isn't a requirement.

It's also important you don't spend all of your life savings on your first real estate investment. It's a good idea to have additional savings set aside and invest with money set aside specifically for investing.

Having built up equity in your home can be a very helpful tool in providing additional cash to invest, especially in low interest-rate environments like we're in today, but I suggest tapping into the equity with caution. Taking out a home equity line of credit (HELOC) or refinancing can provide you with more money for your first deal, but it puts your personal residence on the line in order to do so. If the deal goes south, are you comfortable knowing your equity is gone and you're stuck with a potentially higher mortgage payment than before?

If you have anywhere from $10,000 to $20,000 available to invest, I would suggest your first real estate investment should be a fix-and-flip property to help generate more cash. Rehabs require careful market analysis to ensure accurate estimation for rehab cost and holding costs and that after-repair value can be achieved. But if done well, it can be a very lucrative business model.

If you don't own your own home and have at least $10,000 or more saved, I would suggest your first real estate investment be your own personal residence, ideally a duplex or a single-family home that has an additional unit, such as an inlaw suite, that you can rent. While a duplex may not be your dream home, it's a great way to offset property expenses and pay off your mortgage faster by having rental income. It's unlikely the duplex will generate positive net income for you, but instead will help offset all or a portion of your mortgage. You can choose to use the additional savings to pay down the mortgage faster or save that extra money for your next investment.

If you have $20,000 or more, I would suggest a rental property as your first real estate investment. This can be a single-family rental or preferably a multifamily residential property like a duplex, triplex, or fourplex. While not always the case, multifamily residential properties can provide higher returns while mitigating risk by having multiple tenants to offset unexpected expenses or vacancies when they occur. Buying value-add rental properties, or properties that need renovations in order to rent optimally, will almost always provide better returns and can still provide cash flow and rental income as well as the added benefit of increased equity from the improvements that were made.

If you're not interested in fix-and-flips or are looking to invest passively, I would suggest getting started in real estate by purchasing shares in a real estate investment trust (REIT). REITs provide access and diversification of real estate without requiring you to be an active participant in the management of the properties. This form of real estate investing is particularly great for those who want to get started but may only have a few thousand dollars saved up. Rather than sitting on the sidelines as you save more money to invest, you can grow that money by investing in REITs.

Remember, there's no perfect first investment for everyone. I personally did none of these things when I got started in real estate and was still able to build a successful investing career. The suggestions above are the most accessible and easy ways to get started. Once you get your feet wet, plus a few investments under your belt, then you can consider branching out to larger commercial real estate investments or more complex investing strategies, like mortgage notes.

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This Is What Your First Real Estate Investment Should Be - Motley Fool

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November 3rd, 2020 at 4:54 pm

Posted in Investment