The 7 step investment plan to buying your first property

Buying your first property is one of the most difficult parts of beginning your investment journey. With so many unknowns and so much noise out there about what to do, many investors get stuck in analysis paralysis. However, after speaking with tons of investors, one echoing sentiment is that all of them wish that they had begun sooner.  That is why we put together this 7 step investment plan. With a clear path forward, and measurable milestones you can soon be on your way, through paralysis, to being a successful real estate investor!  --- Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.   Emil: Hey, everyone, welcome back for another episode of The Remote Real Estate Investor. My name is Emil Shour, and I am joined by the lovely   Tom: Tom Schneider.   Emil: And today we're going to be discussing the seven-step investment plan specifically to buy your first rental property. So a lot of people want to invest in real estate, they get stuck before they actually buy their first one, we're going to outline a simple seven step plan to make that dream a reality. So let's get into this one.   Alright, so we're gonna be going back and forth, Tom and I and we're going to outline the seven steps. So Tom, kick us off with number one.   Tom: Awesome. So the first step is to know your financials. And this is really important because you need to know how much funds you have available to acquire homes, while keeping a good balance for reserves. And a great way to go about this is to talk to a lender to get pre approved. This is something that they do day to day and working with people, especially if you plan to use debt, that's gonna be really important where they can help you know, how much funds you have a failed available for doing acquisitions.   Emil: Yeah, let's do a quick example here. So let's say you want to buy a $150,000 home 20% down $30,000 for the down payment. Let's assume I don't know 4k for closing costs and escrow all those different things you might need. So 34, and then I would keep at least another five to 10k minimum and reserves. So you can a lender won't allow it and you don't want to put every single dollar you have into your property and have nothing left. You know, maybe you step into the property, there's some things you need to fix month one, you just don't want to be sitting on on no cash. So make sure you have at least you know for $150,000 home I'd keep five to $10,000 in reserves and you can scale that up, the bigger the property you're buying.   Tom: Yeah, and if you are planning to do debt, a couple of important metrics you're going to need to know is your debt to income ratio. So what are your recurring monthly costs on you know, credit card house, all of that good stuff, versus what you earn as income and it's not the same for every single lender, but they typically want at least a, a three to one ratio of your your income versus debt. So that's going to be an important exercise in knowing that.   Excellent. So let's go ahead and move over to step two.   Emil: Alright, so step two, create SMART goals. I know this one sounds fluffy, but it's very important. You need a SMART goal which for anyone who's not familiar is Specific, Measurable, Achievable, Relevant and Time bound and the reason you need this is because a lot of people will say I want to buy a rental property and they really have no measure of their progress towards that step right so the first step that Tom mentioned know your financials right I could create a SMART goal around that Okay, look at my funds are set get to $40,000 and then my next step is talk to a lender by next weekend and then my next step is choose you know the different steps we're going to outline here but you want to have really specific things right take the take the big meaty goal break it down into small chunks that are achievable that you can create some momentum around that are going to get you to your goal or else you just look at the big thing and you you know you're not you don't have the property and you just give up.   Tom: I think there's something to be set up for momentum in in getting the goals as absolutely small as possible and getting wins on those goals I'm talking about just like identify a lender call the lender call that you know answer the lenders questions blah blah blah so uh you know getting as specific and you know, small as possible. There definitely is some momentum to be gained by doing that.   Emil: Totally.   Tom: Awesome. So this next one is choosing a real estate strategy. And at a at a high level there are a couple of strategies right so there's buy and hold this is I'm buying to hold it for cash flow for a long time. There could be fixin flip, I want to go buy it, I have some construction skills or a network to buy a property and fix it up. Me personally, I want to build a big passive income stream. So I'm buying and holding for the long term. And there's a couple of different parameters here on these different strategies that we have related to experience time, money, risk and reward. And you can pause this if you want, this is on YouTube where you can see where we have a high medium and low of these different strategies where fixing and flipping is definitely more of an experience is very important versus wholesaling hard money lending as well as buy and hold.   Emil: Alright so step four is going to be what a lot of people are probably thinking this video is about which is build your buy box this is essentially what kind of property do I want to buy? What kind of returns do I want to see all those kinds of things so budget and investment profile things like what price Am I willing to pay? Right in our earlier example we said $150,000 property right so let's say that's the amount of cash you have 30k for downpayment, a couple thousand bucks for your closing costs and another five to 10 in reserves.   Okay, now you you're able to buy $150,000 property desired cash flow so maybe you say for every property I buy I want at least 100 or $150 per month in cash flow so being able to say what kind of cash flow Am I looking for for each property? Things like location so what kind of neighborhood are you looking for? Are you willing to buy in a neighborhood that has poor schools and maybe higher crime Are you looking for something that is more stable is going to be in a better neighborhood maybe have higher appreciation those things so getting really specific about what kind of property and what kind of returns are you looking for you can even get down to the property attributes right three bed two bath very common rental property style, but some people buy two bed one bath because maybe they don't want a family living there maybe they just want you know a couple or a single person living in that house. So just identifying these different property attributes the year another big one right.   So you know, you you talk to property managers in the area you talk to other investors you learn that homes built before 1950 you know, they have old plumbing they have they were made of a certain material, so you maybe want to steer clear that so you say okay, I'm only willing to buy homes of this vintage bought in, built in 1960 or later. So all these different little things that really define your buy box and we have lots of materials on this channel, this podcast talking about how to run the numbers, how to analyze deals, so we're not going to get into the exact specifics of those, we have those to help you dig deeper into this one.   Tom: Yeah, I'd say a major problem that a lot of new investors have is they get paralysis by analysis where they're looking at listings either on Roofstock or on the MLS or wherever and you know, just seeing so many properties I think by working before evaluating specific properties building that buy box it's going to make it a lot easier to make that you know yes, no decisions where you're not needing to come up with whatever parameters kind of on the spot so kind of working in a box or buy box working to define these parameters. So when the time the property comes in front of you to evaluate, you have a kind of a yes, no based on this exercise that you already did. And lastly, you know, this buy box is not written in stone. So I think it'll evolve over time as you as an investor, kind of get a better taste of risk profile and what kind of returns you're looking for markets and all that good stuff.   Emil: Yep. And one last note on the build your buy box, you know, let's say we're going to talk about in the next step, so I'm going to allude to the next step here but once you've chosen your market, one thing you'll want to do is actually look at the different sub markets within that market to help you build your buy box right so you may say oh, I want a certain cash flow return or cash on cash but you may be in a market that that's not achievable. So you know, you can say here's my buy box and go find a market or you can do the inverse you can say here's my market and I'll build my buy box from there so just quick note.   Tom: Yeah, and in part of your buy box is thinking about a return profile so these are some terms that Roofstock has used in the past a cash cow which is a high cash flow, perhaps a little bit more beta and the return of that it's a lower rent property. There's a balance buff which is kind of in the middle between the other extreme which is an appreciation a case where it's an a property where it's not cash flowing a ton, but it has some some high appreciation opportunity. Here's a little pros and cons list of the three, Emil, if you want to do a quick hitter of them.   Emil: Yeah, so our cash cow the high cash flowing property typically lower purchase price, you're gonna see a higher cash on cash return always give the warning that remember Excel math can lead you astray. So just know that you may have higher fluctuations even though typically Yes, you will see a higher cash on cash return here.   You have a larger rental renter rental pool, so more people who are willing to live there and you know, some people will say it's more recession proof in that you know, someone who may be in a in the living in the balance buff property. You know, when things get hard, they can move down to The cash cow rental because it's a little bit cheaper, things like that make the rental pool larger. The cons, you have a slower price appreciation, right? So let's say the entire market goes up 10%. If we look at these three properties, the cash cow only went up $6,000, the balance, both went up nine. And then our appreciation property went up 20k, right. So looking at them the same year, your actual dollar value of appreciations lower. And people always want to live in nicer neighborhoods. So that's always a thing that's going to drive up your your prices.   Slower rent growth, right. So same reasons as mentioned for appreciation, just nicer neighborhood rent growth, typically in the past, not always a an indicator of future performance, but will rise faster. And then last note here, as a con more management intensive, right, these are older homes, you may have, again, the neighborhood, the quality of the tenant you're getting, they may not take care of it, it may not be a pride of ownership neighborhood, all those things may make it more management intensive.   I'm going to flip to the appreciation and we'll go balanced because it will make more sense that way. So our Pros for appreciation as we have higher appreciation, right? nicer neighborhood more people taking care of their property. You have multiple sales and exit strategies we just talked about on a podcast about this actually. So that's good timing. Right. Appreciation Ace you have a nicer home, you better neighborhood more people, more owner occupants may want to buy that home when you ultimately decide to sell it. So it gives you some more options. And then you have higher rent growth and the cons, you do have a higher purchase price, potentially longer vacancy because you have that smaller renter rental pool. And you have higher churn costs, right? Imagine a four bed three bath home versus a three bed two bath, you may have more, you know, you have more square footage, more things to potentially repair once a tenant moves out. But on the other end, typically, people living in these homes, take better care of their homes as well.   And then you have the balanced buff, we're just kind of sits in the middle, you get a combination of cash flow and appreciation. These are easier to finance and have a lower purchase price and the Appreciation Ace type property, they're also harder to find because more people kind of stray towards the middle. And it's a little bit older of housing stock compared to the appreciation and again, because they are more competitive, you're gonna have maybe more of a bidding process, if you go looking for these types of properties.   Tom: Yeah, he's the last thing I'll mention on these different styles is there's people who have been successful in doing all of them. And there's people who have been unsuccessful, right? So there, there isn't necessarily a right or wrong strategy. It's it's right for that person, right.   Emil: And you may even want to get a couple right I personally, I have some properties that fall under the cash cow. And then some that fall under balanced. So you can always buy multiple and see which ones perform better for you which one you're you're enjoying owning.   Tom: So the next thing is picking a target market. And this is another way that you can make it a little bit less intense, when you're looking at all the listings, you're not looking at a million different markets, if you can target that market earlier on. And just like we were talking about the different return profiles there is often by in the market, you're going to see more of a certain return profile. So here we see the cash flow, excuse me, the cash cow is more of a secondary and tertiary markets, where there's just perhaps a little bit less competition and a lower price. But you know, relatively higher rent compared to that price.   Then on the other side, we have the Appreciation Ace, these are properties in Texas and Florida, California, Arizona, those really big markets where, you know, on a cash flow basis, they're not going to be a very high return. But there's the opportunity on appreciation upside.   And then lastly, there's that balance buff, which is right in the middle. It is the kind of secondary to first, whatever hit tier markets in Atlanta, some stuff in Florida as well and some stuff in Texas. But again, these are kind of generalities, there's really stuff of all different levels and all different markets. But at a very high level, there tends to be a little bit more based on these different breakdown.   Emil: All right, Step six. This is a super, super important one, especially if, if you're listening to this you are most likely a remote real estate investor, meaning you're investing out of state or potentially even out of the country, building your team identifying your team. So since you're not there to manage the property and look after it and find it and all those things. you're relying on a team of people this is so important and is going to be the thing that determines your success.   Again, you can run all the numbers and everything in your spreadsheet but this is a business a physical business. It's a physical property and you're dealing with people. So the people on your team are the ones who are dealing with all those things. And you need to choose them wisely.   So the big ones you're going to want to focus on, we have our starting five in the bottom, bottom right, which is a nice little basketball analogy. So your point guard your deal source. So that could be a, a real estate agent and investor friendly real estate agent, a investment property listing site like Roofstock, any anywhere where you can get deals, right, so who's going to help you find deals.   The second is your inspection providers. So this one, you don't even have to really worry about until you're under contract. Oftentimes, your deal source can help you with this, whether it's an agent, whether it's refseq, they can help you find the inspection provider. Lender, lenders an important one. So again, you want to make sure before you're going out and making offers you get pre approved you know your rates, you know how much you can afford all that stuff, the power forward, which I think is your make or break and I want to stress this one the most, they're your property manager, they are the person who is dealing with your property, they're dealing with the tenants are finding new tenants, they're renewing the lease, they're doing all the operational things that you are outsourcing, which is the most important. So this is a very, very important one, make sure you spend a lot of time speak with a lot of different property managers in whatever market you're looking at, make sure you understand who they are.   It's common Tom and I can both speak on this, it's not uncommon to you know, go with a property manager, it doesn't work out and you look for someone else on your list. So know that this is a very important person on your list. And it may take a couple tries to find the person that's the right fit for you.   And then the last one, your insurance provider. Another one that I would say is not critical before you buy your property more so when you're under contract, but another person who's important on your team.   Tom: And a couple points here, some people might see this list and kind of get overwhelmed. The really key ones to get up front is your deal source next is going to be your agent or broker Roofstock’s a great spot. And the other one is going to be your lender if you're planning on using debt. And then also I would say your property manager even before you acquire one of my favorite things to tell friends that are getting into investing is to talk to your property manager before even buying and even get their input on the property that you're acquiring. And I would lay it on the table say, Hey, my name is Tom, I'm looking at buying 123 Main Street, what do you think of 123 Main Street, you know, what do you think the rent would be? So there's, there's no reason why you can't proactively bring that property manager into the conversation.   And all the other ones, I'd say, I'm trying to think of a basketball analogy, but I'm struggling, you're who you pick as your property manager, they're basically you're going to be have a farm team to be able to do your handyman and all that stuff, because that property manager will have those resources.   All right, tying it all together. Step number seven. So this last step in the seven step investment plan is to set up a monthly plan review. This is where you're you're building your SMART goals, you're building your buy box, you're doing all of identifying the the work that needs to be done, set up a regular cadence of reviewing how you're making progress against these goals. And there's some great questions you can ask yourself, what is going well, what is not going well? What changes are needed? Does this plan still excite me? And do did I over underestimate funds, time allocation, etc. I think in any type of endeavor, introspection is really important. So setting up a regular time on your calendar, where you're kind of circling back and asking yourself, what went well, what didn't go, Well, what can I do better? It's gonna make you that much more effective and committed and all of those other good superlatives.   Emil: Yeah, I have a tip for this because I had this originally in my calendar, and I would always miss it. And one thing I did that made this so much easier is I have a quote unquote, an accountabilibuddy. And every week we have a check in and we talk, you know, I text a couple things that at the end of the call, I text a couple things that I'm going to get done that week. And my friend who does this as well with me, he does the same thing. The following week, we check in on those, those action items, those little SMART goals to make sure that they were completed and we're reviewing and talking things out. And so I felt like having somebody who's in your same shoes either, you know, someone who consider a mentor or someone who's in the same stage, to like be able to bounce ideas and hold each other accountable. That makes this step so much easier and actually more impactful as well.   Tom: Totally, a little bit of social pressure of talk telling someone you're going to do it and then circling back like i i, within restock Academy, we have mastermind groups and I'm part of one and it's man, it makes a difference on having not only the monthly plan review, but that social accountability is is really powerful and getting getting things done.   Emil: Yep psychologically proven.   So there you have it. That is our seven step investment. plan to help you buy your first investment property. I know we covered a lot but honestly if you follow these steps, you'll be in great shape. We have a lot of supporting stuff like we mentioned about building your buy box, how to analyze properties on this channel. So if you want to do some more digging, we have all those resources available for you. Hopefully this helps you get unstuck get you that first property and get you on your way to building your property portfolio. Happy investing everybody.   Tom: Happy investing.