7 Steps to buying your first investment property

Learning about investing is a journey and you are PUMPED to get started! You have taken a hard look at your financial health and are ready to take the first step towards putting your money to work for YOU. Investing in real estate is an extremely personal decision and requires focus and persistence to pull off. For first time investors, the process can be a bit overwhelming. Here is an overview to help get you take that first step.

1) Select a Real Estate Agent that is ALSO AN INVESTOR. When looking for an investment property, it is ESSENTIAL that you are working with a Real Estate Agent that is also an INVESTOR THEMSELVES. Real estate agents know the local market, negotiate on your behalf, and have connections with lenders, title companies, and contractors. The right agent can help you vet properties, estimate rehab costs, provide input as to what a unit might rent for, what monthly expenses you might expect (taxes, utilities, maintenance, etc), and most importantly, they probably have contractors that they can recommend to you.

2) Have your financing ready to go. Buying investment property is often a competitive situation unless you have found an off-market deal. Sellers require that proof of funds be submitted with all offers. This means that before you even make an offer, you need to either have a printed bank statement that shows sufficient funds to buy the property in cash OR a letter from a lender stating that you are pre-qualified or pre-approved for a loan in the amount needed for the purchase. Your Real Estate Agent can refer you to a loan officer or you might ask for referrals from other investors.

3) Get good at analyzing properties. One of the wonderful things about investing is that there are many different strategies, but I’m only going to address the two that I deal with most in this post. When I’m vetting properties for my own portfolio, I run the numbers on each property as a Fix and Flip and as a BRRRR (buy, rehab, rent, refinance, and repeat). Each strategy requires a different formula, and will also include different kinds of financing, different timelines, different ROIs, profit vs. cashflow, the list goes on. Keep in mind, while your Real Estate Agent can help you estimate the numbers you will use for this analysis, IT IS YOUR JOB AS THE INVESTOR to run your own numbers.

4) Make an offer. This is one of the areas where your Real Estate Agent is worth their weight in gold. They will provide a comparative market analysis, listen to your goals, work with you on the offer, and negotiate with the seller’s agent on your behalf. Keep in mind, your agent won’t be keen on the idea of writing low ball offers for hundreds of properties… it simply is not worth their time. Work together with your agent to target the properties that are a good fit for your portfolio and devise a strategy for making reasonable offers together.

5) UNDERSTAND DUE DILLIGENCE and the costs involved.

Vacant land: when purchasing vacant land in Hampton Roads, some things to consider include:

• Does the soil perc? This is relevant to the type of septic system to be installed. This can be done by ordering an initial soil boring and sighting of a drain field. This costs roughly between $600-$800 (as of May 2020)
• Survey: a survey is essential to determine the true boundaries of the property and can reveal unrecorded and undocumented easements (example: neighbors driveway cuts across a corner of the property). The cost will vary based on the size of the property, but as an example, we recently bought a survey for 5 acres for $1200.
• Resource Protection Areas: The Chesapeake Bay Preservation Act was enacted by the General Assembly in 1988. It was designed to improve the water quality in the Chesapeake Bay and other waterways by requiring effective land management and land use planning. Generally, there are two types of environmentally sensitive lands:
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• Resource Protection Areas. These are tidal wetlands, non-tidal wetlands and tidal shores with a buffer area of 100 feet around them. This area is the most strictly regulated because it has the greatest effect on the bay's water quality.
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• Resource Management Areas. This buffer starts from the Resource Protection Areas and goes another 100 feet.  
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• Typically, you can not build or develop within 100 feet of a waterway .
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•  CALL/COORDINATE with your county to understand what can and cannot be done in a RPA (Resource Protection Area).

Houses require additional due diligence:

• Home Inspection: Experienced investors who are buying with cash or who buy properties at auction often do not bother with a home inspection. They have experience doing extensive rehab projects and have the resources and financial partners to deal with surprises. However, if you are a new investor, YOU MUST GET a home inspection. You can expect to pay approximately $400 for a home inspection (May 2020). A home inspection report will give you an idea of the scope of work needed for rehab (must do’s as opposed to cosmetic fixes) and can be used to further negotiate the price of the home.

6) Appraisal. An appraisal only comes into the picture if you are using a financial institution like a bank or credit union to finance the purchase. Keep in mind that neither the pre-qualification nor the pre-approval means that the bank guarantees you the loan. The bank will also want to take a close look at the home being purchased. It will order an appraisal to determine that you are buying it at a fair market value, but you will bear the cost (approximately $500 as of May 2020). They do not want to offer a loan for more than the home is worth. This protects their investment in case you default on the loan and they have to put the house back on the market.

7) What to expect at closing. The time it takes between the acceptance of an offer and closing depends on many factors. Experienced investors paying cash can close in as little as 10 days because there is no bank involved (no need to order an appraisal) and they often don’t get a home inspection. However, if you are using a loan to finance the purchase, you can expect a period of 30-45 days to close. Have you heard the phrase “cash is king?”. This is why… investors who can pay cash for a property can close quickly.

Closing is handled by an attorney and title company which performs an array of ESSENTIAL tasks that each comes with their own cost.

• Title Search, Examination and Recording of Title. This process reveals any liens on the property that could interfere with your ownership of it.
• Title Insurance: There are two kinds: Lender’s Title Insurance which protects the lender against any issues that may come up in the future regarding the title of the property and Owner’s Title Insurance which protects you, the investor. Lender’s insurance is only required if there is a loan, and yes, you pay for it. Home Owner’s Title Insurance protects YOU, the investor.

Title Insurance protects you when disputes arise. Here are some things it covers:

• Title forgeries
• Back taxes
• Filing errors
• Unknown heirs to the estate who claim ownership
• Inconsistent or conflicting wills
• Liens, commonly from unpaid home equity lines of credit (HELOCs) or contractor bills
• Undocumented easements
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• Taxes and other fees: You know the saying: Nothing in life is certain except death and taxes? You can expect to pay an array of county/city taxes and other settlement charges.

• TOTAL COST OF CLOSING IS TYPICALLY $2500-$5000.

In VA, the buyer gets the keys at closing. I NEVER recommend taking possession of a property before closing (and that includes delivering building supplies).

Whew! You made it through the process and congratulations on your new purchase! Keep in mind, that every transaction is unique, and the steps above are just a general guide to give new investors the “big picture”. I hope you enjoyed this article and welcome any questions and comments.