You've been thinking about buying your first investment property for months, but every time you get close, the questions flood in. What if you choose the wrong market? What if the numbers don't work out? What if you're missing something crucial?
We've worked with thousands of first-time investors who felt paralyzed by these same concerns. The fear of making an expensive mistake with your hard-earned money keeps many would-be investors stuck in analysis mode forever.
Here's a systematic approach that can help you minimize the guesswork and move forward with conviction. These 10 essential steps can take you from uncertain beginner to confident investor, and cover everything from market analysis to closing day.
What The Experts Never Tell You
You may already know that investment property can potentially provide you with regular monthly cash flow and long-term appreciation. You probably also know that even when you use conservative leverage, you don't always need a lot of up-front capital to invest in real estate.
However, there are also a few things to consider that the real estate experts never tell you:
Real estate markets and the overall economy move through normal, somewhat predictable up and down cycles. Knowing this helps you understand how, when, and where to invest in property.
The longer you hold investment property, the more likely you are to see positive net cash flow and appreciation. That's due partly to real estate cycles, partly to debt amortization schedules, and is also influenced by the long-term effect of property appreciation.
Real estate is not liquid. It can easily take months (or longer) to sell at an exit number that you’re comfortable with.
Buying an investment property takes time. You'll need to commit to researching individual real estate markets and understanding how to use different financial formulas to help predict the potential performance of a rental property.
How to Plan Ahead Before You Invest
Before you buy your first investment property you should spend some time to prepare, both financially and mentally. Keep these important things in mind:
Potential Risks
1. Negative cash flow due to overestimating the fair market rent:
Let's say you assume you can rent a property for $1,500 per month based on outdated comparables, but the actual market rate is only $1,350. That $150 monthly shortfall can eliminate your profit margins and force you to cover expenses out of pocket.
To reduce the risk of investing in a money-losing property, you can use a simple rental property analysis spreadsheet (like this one) to model the potential financial performance of a given property.
2. Unexpected major repair bills:
Most properties you plan to own long-term will at some point require a large and expensive repair. For example, the air conditioning or furnace could go out, or you could have a major plumbing repair that can put you out of pocket $3,000 to $8,000.
To avoid getting caught off guard, model and then set up a capital reserve account for any emergency repairs.
3. Vacancy rate higher than planned:
Sometimes, due to local market conditions, it can take longer than expected to find a qualified tenant. For example, if your property sits vacant for three months instead of one, you'll still need to pay landscaping, property taxes, and the mortgage while receiving no rental income.
When you put together a pro forma on your first investment property, try “stress testing” it by experimenting with different vacancy rates. Creating different vacancy scenarios will give you a clear picture of how much cash you'll need to hold in reserve if the property sits vacant longer than expected.
Planning Ahead
1. Take care of yourself first:
Some beginning real estate investors go "all in" when they buy their first investment property. They scrape together every dollar they have, borrow from friends and family, while leaving nothing in reserve for a personal emergency fund.
Real estate investing should supplement your financial stability, not threaten it. If you lose your job or face a medical emergency, you don't want to be forced to sell your rental property at a loss to cover personal expenses.
Build your foundation first by having 6-12 months in savings, and contributing to an IRA or 401(k). You'll have the advantage of tax-deferred savings, and as an extra bonus you may be able to set up a self-directed IRA for investing in real estate, allowing you to build a tax-sheltered investment property portfolio.
2. Strengthen your credit score:
Most lenders require a credit score of at least 740 to give you the best rates and terms for a mortgage on a residential investment property. High credit card balances should be paid down, and negative marks on your credit report should be addressed before you apply for a loan and make an offer on a rental property.
3. Build your cash reserves:
When you buy your first investment property you'll need money for the down payment, escrow fees, legal fees, and closing costs, and repair or renovation expenses if you're not buying a turnkey property.
If you are financing your purchase, some lenders will also require you to hold six months or more of cash in reserve. That way, the bank knows you'll be able to pay the mortgage in case there is no rental income due to a longer than expected vacancy or a delinquent tenant.
10 Steps for Buying Your First Investment Property
Real estate can be one of the most reliable investments you can make, provided you follow some tried and true best practices:
#1: Ask yourself if you really want to be a landlord
Managing an investment property on your own can require a surprising amount of time and money. Let's say you get a call at 10 PM about a broken water heater, or spend your Saturday dealing with a tenant complaint about noisy neighbors. Many investors who get into real estate while juggling a full-time job or their own business hire a professional property manager to oversee the daily operations of each property.
If being a landlord isn't for you, you can always invest in real estate indirectly through a joint venture, crowdfund, or a REIT.
#2: Get rid of high-interest personal debt
Credit cards, medical bills, and auto loans can take a surprisingly big bite out of your personal cash flow. For example, if you're paying $400 monthly on credit card debt at 22% interest, that's $400 less available for your investment property mortgage or emergency repairs. While some debt isn't always avoidable, you don't want to be in a situation where you have to choose between paying the loan on your investment property or a credit card.
#3: Save for your down payment
Lenders usually require a bigger down payment for an investment property (at least 20%). There are a couple of advantages to putting more money down.
First, you'll receive a better interest rate and loan terms. Second, you'll have more free cash flow due to a lower mortgage payment. In most cases, using a conservative LTV ratio (loan to value) of 75% by making a 25% down payment may give you enough equity and cash flow to generate a healthy and safe return on your investment from day one.
#4: Build up your cash reserves
In addition to your down payment and closing costs, you'll also need to hold cash in reserve for unexpected repairs or reduced rental income due to vacancies.
Many investors also build up their reserves over time by contributing a fixed percentage of cash flow each month into a special capital reserve account.
#5: Use a property listing site built specifically for investors
Once you’re ready to start looking for rental properties, many people assume sites like the MLS, Zillow, or Realtor.com are the only places they can look.
But here’s why you should consider the Stessa investment property marketplace.
Unlike generic listing sites built for casual browsing, the Stessa marketplace comes with built-in filters designed around key metrics like cap rate, gross yield, and projected rent to help you compare deals with confidence:
Investor-focused filters: gross yield, cap rate, cash on cash return
Proprietary metrics: rent range, neighborhood score, crime score
Map layers
Property characteristics
Instant buy box alerts
Be the first to know when your ideal opportunity arises
Looking for a 3br SFR with a pool? Or a triplex with $2k+ projected rent? Or anything in Little Rock with an 8%+ cap rate? Use specific property characteristics and investment metrics to build your custom buy box, and you'll receive notifications the instant new matches hit the market.
Unlock your investment edge with smarter underwriting
Roofstock (Stessa's parent company) has provided institutional investors with powerful intelligence for years, and now brings you that same analytical edge. Access their proprietary metrics, like projected rent and neighborhood scores, on most listings to analyze opportunities with confidence. Easily tweak models to account for your specific scenarios, limiting surprises, especially when it comes to year-end accounting.
#6: Compare paying all cash to financing
Even though the housing market is still performing well in many parts of the country, there are always good investment properties on the market for those willing to look.
Sometimes, you'll need to move fast to get the best deals. For example, if a property has been priced below market value, other investors may submit offers within hours. If you choose to pay in cash (or make an extra-large down payment to speed up your loan approval) you may be able to refinance at a later date to pull out some of your original cash.
If you are financing, you'll need to get pre-qualified for a loan before you make an offer on an investment property. Requirements your lender will look for include:
A credit score of at least 680
Job history over the last two years plus tax returns, and up to five years if you are self-employed
Cash on hand for the down payment
Detailed list of all assets and liabilities
Low debt to income ratio (DTI) of 36% or less (although some lenders may accept a higher ratio)
#7: Develop your local real estate team
Finding and buying your first investment property is much different from buying your own home. You'll need to develop a real estate team made up of professionals who understand how income property works.
Key members of your local real estate team can include a real estate agent who works with investors, a local lender and attorney, and a good property management company with an established network of cost-effective service professionals.
Your first investment property doesn't have to be in the same city that you live in. Many real estate investors who live and work in high-cost markets choose to invest long-distance.
If you’re interested in a property on the Stessa marketplace, we’ll connect you to vetted agents to handle the details so you can focus on making your next move.
#8: Analyze each market on a macro level
Some markets will perform better than others for investment property. And each market will have its own dynamics. Some might offer returns in the form of higher long-term appreciation, while others offer consistent cash flow.
Factors that commonly make a market attractive to rental property investors include:
High population growth
High employment growth and a low unemployment rate
Growth in median household income levels
Percentage of renter-occupied households increasing
Lower vacancy rates and rising median rent trends
Growth of housing prices
Solid neighborhood ratings
Better school rankings
Lower crime rate
For example, the Indianapolis, IN metro has shown consistent population growth annually, strong job growth, and a high percentage of renters due to home prices. These factors have recently created steady demand for rental properties.
#9: Master the art of financial analysis
After you've narrowed down a market to invest in, the next step is to analyze the potential financial performance of several investment options. By comparing different properties to one another, you'll gain a better feel for which property might be best for you.
Start by creating a proforma statement for each property. Begin with the property gross income, then subtract the vacancy and bad debt expenses, recurring operating expenses such as landscaping and maintenance, property management fees, and your mortgage payment to arrive at your net cash flow.
Built-in underwriting is another nice feature of the Stessa marketplace. The return metrics are already estimated for you so you can more easily compare the potential returns of properties side-by-side.
#10: Take the leap!
You can read books and listen to podcasts for months, but at some point, you'll have to take the leap and make that first offer.
Many first-time investors choose to buy a turnkey property, meaning the property has been recently renovated and is rent-ready.
You can also choose to take on a renovation if you feel comfortable taking on a project.
Final Tips to Help You Buy Your First Investment Property
There are numerous benefits to owning investment property. Tenant rents help pay for your operating expenses and mortgage, with any remaining cash flow left over as profit. Property depreciation can then be used to reduce your amount of taxable net income, sometimes even to zero (even when you actually earn a cash profit).
Investment real estate can also be a great way to diversify your investments and build your wealth over the long term. Of course, each advantage comes with potential drawbacks as well.
To make your first investment property as profitable as possible be sure to:
Calculate accurately: Verify repairs and ownership costs, property values, and fair market rents using recent comparable sales and rental data.
Understand that ongoing ownership costs include not just your mortgage, but also expenses such as leasing and property management, recurring repairs and landscaping, and property taxes.
Avoid getting emotional: When you're buying your own home, it's fine to care about things like paint color and carpeting, but always remember that investment real estate is first and foremost about ROI.