First-Time Buyer’s Guide: Key Steps to Investing in Real Estate
Introduction
Investing in real estate is one of the most effective ways to build wealth, create financial security, and secure your family’s future. For first-time buyers, however, entering the world of real estate can seem very intimidating. With different financing options, property types, and investment strategies to consider, it’s hard to feel sure of where to start. Knowing the steps to investing in real estate can help you feel more confident and give you a starting point.
This guide to the steps to investing in real estate is designed to provide a broad-strokes overview for those who are new to real estate investing in rental properties. This is in no way a comprehensive guide, but can serve as a guideline as to things you should plan on addressing and learning more about in the real estate industry. Whether you’re looking to buy your first home as an investment property or you’re ready to take the leap into rental real estate, these steps will help you navigate the journey from novice to knowledgeable investor.
While this guide covers the benefits of long-term rentals, I do also LOVE a good fix and flip. You can see some of my own rehab projects along with some really cool before and after photos here.
Step 1: Understanding Real Estate as an Investment
Real estate is often seen as a cornerstone of wealth-building, and for good reason. It’s a tangible asset that, over time, tends to appreciate in value while providing potential cash flow through rental income.
But what exactly makes it such a solid investment?
First, real estate offers appreciation, which means the value of your property will likely increase over time. This long-term growth is especially beneficial for those investing early.
In addition to appreciation, real estate can also generate immediate income through rental properties. Your goals here will be different than they are when purchasing your primary residence. A rental property can serve as a wonderful long-term investment. If the property is carefully chosen and well-managed (you can use a real estate agent to manage this property if this is something you don’t want to be “hands on” with), the rent you collect from tenants should exceed your mortgage, providing positive cash flow. The tenant’s rent will cover the amount of your mortgage, property taxes, and insurance. Over time, rental rates will go up, but your monthly mortgage payments should stay the same (assuming you’ve financed using a long with fixed interest rates).
So, now your cash flow from rent is increasing, providing extra income, and you simultaneously have property appreciation (property value goes up) which increases your net worth, and the balance of your mortgage is going down with every one of the monthly payments made.
Lastly, real estate offers significant tax benefits. Depreciation, for instance, allows investors to reduce their taxable income, while certain expenses related to the property, such as repairs and property management, can be written off.
As a first-time investor, understanding these benefits is key to your strategy. You’re not just buying property—you’re investing in long-term financial growth.
Thinking through those three benefits (appreciation, income, and tax benefits) should get new investors excited about becoming a successful real estate investor. I know it did for me when I started investing!
Step 2: Setting Your Financial Goals
Before diving into real estate, it’s essential to clarify your financial goals. What do you hope to achieve with this investment? Are you looking for short-term cash flow through rental income, or are you more focused on long-term appreciation?
Perhaps you envision buying a home now that could one day fund your child’s college education, or you see this as the first of many properties in your investment portfolio. Whatever your goals are, they will shape your approach to real estate investing. Before you start along any of the steps to investing in real estate, you need to sit back and plan and envision your future.
Sometimes it really helps to write these investment goals down. Writing down your dreams and goals is one of the best ways I’ve found to start creating a plan. When you can see the plan then you can start envisioning putting it into action. Suddenly you’ll be able to see the first step, the next step, and so on. It’s like a business plan for your real estate investment strategies. I do this myself, and I have created some worksheets that can help you get started with defining and writing down your goals. You can find those (they’re free for you to download) here. Writing down your goals can really help you figure out which real estate investment strategy will fit you best.
My Own Experience
Real estate is also a powerful tool for legacy building. In my own journey, I purchased a property for my son when he was young, leveraging the rental income to fund his education and providing me a way to gift him a “free and clear” house after about 25 years. This is an example of long-term, thoughtful investing that builds wealth over generations—a strategy I discuss in greater detail in my book.
Step 3: Getting Your Finances in Order
Once your goals are set, it’s time to take a hard look at your finances. This is one of the most critical steps for first-time buyers, as your financial health will directly impact your ability to secure a mortgage and purchase your first investment property.
Start by reviewing your credit score. Lenders use your credit score to assess the risk of lending to you, and a higher score will generally result in better loan terms. Aim for a score of at least 620, though higher is better.
You’ll also want to consider your debt-to-income ratio (DTI), which compares your monthly debt payments to your monthly income. Most lenders look for a DTI below 43 percent. If your DTI is too high, you may need to pay down some debts before applying for a loan.
Finally, make sure you’ve saved enough for a down payment. While the standard down payment for an investment property is around 20 percent, there are some loan programs that allow you to put down less. Be sure to also budget for closing costs, repairs, and other expenses associated with buying property.
Step 4: Choosing the Right Market
“Location, location, location” is a well-known mantra in real estate, and for good reason. The real estate market you choose to invest in will have a huge impact on the success of your investment. But how do you find the right market?
Start by researching areas with strong job growth, good schools, and a low crime rate. Cities with growing populations and expanding industries tend to offer better appreciation potential. You should also look for areas with a solid rental market—places where there is demand for rental properties and where vacancy rates are low.
It’s important to balance your research between national trends and local knowledge. While online resources such as Zillow, Realtor.com, and Redfin can provide insights into housing trends, connecting with local real estate agents and investors will give you a better understanding of specific neighborhoods.
Step 5: Understanding Property Types
As a first-time investor, you have several types of properties to choose from, each with its own pros and cons. The type of property you choose will depend on your financial goals, budget, and willingness to manage tenants. When you start out, residential real estate will most likely be the most appealing (and comfortable) for you to take on.
- Single-family homes: These are the most common choice for first-time investors. They tend to attract long-term tenants and are relatively low-maintenance. However, if the home is vacant, you’ll need to cover the mortgage yourself.
- Multi-family properties: Duplexes, triplexes, and quadplexes allow you to rent out multiple units. These properties can generate more rental income, but they also require more management and upkeep.
- Condos: Condos can be an affordable entry point into real estate, but homeowners association (HOA) fees can eat into your profits.
Think about how much time and effort you want to put into managing the property, as well as the type of tenants you want to attract, when choosing your first investment. Some rental property owners enjoy taking care of the property management themselves, others don’t like dealing with tenant relations. That’s all up to personal preference and comfort.
Of course, there are also opportunities in commercial real estate, buying commercial properties such as warehouses, office buildings, shopping centers, or apartment buildings for example. While these can make wonderful investment properties, this will likely not be where you’ll be starting out as a new investor. We can get there though, and the more comfortable you get with real estate investment opportunities, the more types of real estate investments will begin to become attractive to you.
Step 6: Financing Your Investment
Securing financing is one of the most critical steps to investing in real estate. Fortunately, there are several loan options available to first-time investors in the real estate investment process.
Conventional loans are the most common, but FHA loans may be an option if you plan to live in one unit of a multi-family property while renting out the others. These loans require lower down payments and can make it easier to break into the market.
Leverage is also a powerful tool in real estate investing, as it allows you to use borrowed funds to purchase properties. By putting down a smaller amount of your own money, you can finance larger properties and potentially see higher returns. However, it’s important to manage leverage carefully to avoid becoming over-leveraged.
Additional types of financing includes hard money loans and also DSCR loans, but these loans often come with higher interest rates and require higher down payments to secure financing. It’s a good idea to avoid some of these (like hard money loans) for long term goals, but they might prove useful when seeking real estate funds for good deals that would work for a quick fix and flip.
Step 7: Conducting Due Diligence on Properties
Once you’ve found a potential property, it’s crucial to conduct thorough due diligence before making an offer. This means carefully evaluating the property to ensure it meets your investment criteria.
Key metrics to consider include:
- Cap rate: This is the ratio of the property’s net operating income (NOI) to its purchase price, expressed as a percentage. A higher cap rate indicates a better return on investment. I have a worksheet for calculating cap rates on my website (it’s free too), and you can find it here.
- Cash-on-cash return: This measures the annual return on your investment, taking into account how much cash you’ve invested. It’s a great way to gauge the performance of leveraged properties.
In addition to those financial measures, you’ll want to make sure that the right property meets your physical guidelines. Be sure to conduct a full property inspection and estimate any repair or maintenance costs. Hidden expenses can quickly eat into your profits, so it’s important to go into the deal with eyes wide open as to any immediate repair needs as well as potential ongoing maintenance costs.
By the way, isn’t it eye opening that the first 7 steps to investing in real estate all happen before you even buy the property? Planning and preparation are key.
Step 8: Making the Purchase
Once your offer has been accepted, the process moves to closing. During this time, your lender will conduct an appraisal, and you’ll go through a title search to ensure there are no legal issues with the property.
You’ll also finalize your financing and prepare for the closing meeting, where you’ll sign all the necessary documents. Once everything is signed and the funds are transferred, the property will officially be yours.
This is the most exciting of the steps to investing in real estate!
Step 9: Managing the Property
Now that you’ve purchased your property, it’s time to manage it effectively. As a first-time investor, you have two main options: managing the property yourself or hiring a property manager.
Managing the property yourself can save money, but it also requires more time and effort. You’ll need to handle tenant screening, rent collection, work on keeping your vacancy rate low, respond to maintenance requests, and more. On the other hand, hiring a property manager can take the burden off your shoulders, but it will eat into your profits.
Whichever option you choose, be sure to keep detailed records of your income and expenses. This will help you track your return on investment and stay organized for tax season.
Step 10: Planning for Long-Term Success
Investing in real estate is a long-term game. Once you’ve secured your first property, it’s time to start thinking about how you can grow your portfolio over time.
Reinvesting the profits from your first investment can allow you to purchase additional properties and scale your real estate business. Additionally, as the property appreciates in value, you may have the opportunity to refinance and pull out equity for future investments.
It’s important to have a clear plan in place for growing your real estate portfolio. Whether your goal is to create passive income, build generational wealth, or fund your retirement, real estate can be a powerful tool in achieving financial freedom. For more detailed advice on scaling your investments, and walking with me through the real estate deals I personally undertook with my son, my book provides a step-by-step guide for long-term success.
In it, you’ll find long term residential property investing, changes in property values over time, finding a good investment, setting up a short term rental (Airbnb), fixing and flipping a property, and how to utilize tax laws to generate tax free wealth from your own home.
Conclusion: Steps to investing in real estate
Investing in real estate as a first-time buyer can be an exciting and rewarding experience. It has been life changing for me, and for my family. I’ve worked in real estate as my full-time job for over 23 years, but the easiest and most steady income I have ever received has come from my real estate investment business. By following these ten steps, you’ll be well on your way to building a solid foundation for your own long-term financial success.
The key is to approach each step thoughtfully, from setting your goals to managing your property. Real estate offers numerous benefits, and with the right strategy in place, it can be a powerful tool in your financial toolbox. So take that first step, and start your journey toward building wealth through real estate.
If you’re looking for more in-depth advice on getting started, the book covers everything you need to know as a first-time investor, from financing your first property to scaling your investments over time. Also, subscribing to my website will give you weekly tips, articles, information and up to date advice to help you. I want you to succeed, and can’t wait to see what you accomplish!
