Real estate investing is hot, and we get a tremendous amount of questions from the elfin community about how real estate investing works. In this article, we share the 7 steps to buying your first investment property.
Real estate investment in 2023
Before we share the 7 steps with you, it makes sense to reflect on the question of whether real estate investing still makes sense anno 2023? Taxes are more unfavorable (high transfer taxes), property prices have skyrocketed, and the government also expects to tax property income more heavily. Whether investing in real estate is of interest to you is very personal. Want to invest in real estate but not purchase a property yourself? Read this article where we share with you alternative ways of real estate investing.
Luck favors the prepared
You have to have a little luck in today’s market, but above all be tremendously on top of it: acquire knowledge, build networks, do calculations, figure out numbers and observe the market. The moment you know exactly what your options are, you can do a targeted search and strike when a great lot comes along. So make sure you have the steps below figured out for yourself before you actively start viewing and making an offer.
Step 1: map out your financial situation
Essential: what can you financially slate? Is buying real estate an option for you? The maxim is that you should bring at least 30% of your own money. Is an object worth 100,000? Then you have to bring 30,000 euros. We see a lot of promotion on the Internet from people saying that you can invest in real estate even without your own money, and that may well be true, but we like to minimize risk. So too when it comes to real estate investing. Find out at least the following aspects to the penny:
- Equity: what is your equity, and this is more than what you have in the savings account. For example, do you already have a home for sale? And do you have excess value on this (value of the house minus the mortgage)? That is also equity.
- What is your income? Do you have income from work, and if so, how much is this gross on an annual basis?
- Contract: if employed, what kind of contract do you have? Can you get a letter of intent from the company where you work?
- Do you want to purchase real estate alone, or are you doing this with your partner/brother/parent/friend? Does he/she/it also have equity?
- Check out your financing options. Will you purchase in the “traditional” way, or will you borrow from a wealthy parent/friend instead of the bank, for example?
Step 2: Make a return calculation.
This is very important. You need to know what your return is if you can buy for price A and rent out this property for price B. Of course, you don’t know in advance exactly what you can ask for rent, but you can make a very good estimate if you go through step 6 properly later.
Step 3: Map out why you want to invest in real estate.
There are several reasons why you might want to invest in real estate:
- Build long-term wealth
- Create passive revenue streams
- Flipping: buying up, refurbishing and selling an old property to make short-term money
Depending on these goals, you decide what you want to buy. Some people choose to buy job properties, fix them up and sell them for a profit. This is also known as flipping. This is especially interesting if you are very handy and can do odd jobs yourself, otherwise this can be an expensive affair.
Step 4: Be aware of the pros and cons of real estate
Investing in real estate can be smart. But it’s not all hosanna. There are also drawbacks to it, which you need to be prepared for. The disadvantages that can occur that you do need to think about are as follows:
- You may be dealing with vacancy. What do you do if your property hasn’t been rented for a while? Can you pay for it yourself?
- What do you do when the tenants make a mess of things? You’ve probably heard horror stories (weed plantations, a house full of foreign workers, vandalism, etc.) and this is not to be merry.
- What if something suddenly breaks down? Do you have enough money set aside for repairs?
- In addition, the government has plans to tax real estate investors more heavily. They already did this in 2021 with the transfer tax. But perhaps they will also tax income from rent. For now, these are plans and we do not yet know what this will mean in practice. But make sure you have this in your sights and know where the flag stands.
- On an investment property, you don’t get a mortgage interest deduction. Don’t count yourself rich in this area!
- The grace period on an investment property is often shorter than the 30 years on your own home. Don’t get surprised after 5 or 10 years, make sure you pay off or refinance your financing on time.
Step 5: build a network
Crucial, in every area of your life, to success. The following people are useful to have in your network:
- Purchase broker. The moment you want to buy a property, in a sought-after market, the experience is that a good buying broker can help you get the property.
- You may not want to have to worry about your property, no hassle with payments and especially not be called every week when something is wrong. Then you can work with a rental broker who will rent out your property. You pay a fee for this; after all, unburdening costs money.
- At the time when financing needs to be arranged, it’s damn handy to have a good financial advisor. Someone who knows your situation, who knows the ropes and quickly arranges the best financing. This, too, costs money, but again, that bit of relief and expertise.
- Having someone you can call when something is broken, and who won’t screw you over, is very nice. So a reliable handyman!
Step 6: Make sure you have the market mapped out
Simple, but crucial. In which city can you charge which rent in which neighborhood? And this goes beyond the rent. Which city and which district, is developing? Because apart from being able to charge a good rent now: if you are investing for the long term, you also want your property to increase in value.
Step 7: Provide knowledge
Knowledge only becomes worth a lot when you put it into practice, but going into the real estate market without knowledge does not seem wise to me. You obviously want to be able to talk to the experts in your network and know what they are talking about, and in addition, you just want to know the ropes when it comes to these types of serious investments. What you need to know anyway, apart from all the info at the previous steps, is the following:
- Leasehold value. If you’re going to finance a real estate property, most lenders will get you financed up to 80% of the value in rented condition. This means the following: suppose your property is rented out, and you go bankrupt, and your collateral, that is, your investment, is going to be sold by the lender, it will be worth less than what you bought it for, simply because there are tenants in it. That makes a property less desirable. How much the difference between the price you paid and the value in rented condition is different for each property. This also depends on the location and condition of the property. Again, your network is important, as a good real estate agent often appraises as well, and is sometimes quite willing to do a favor.
- The VVE: when you buy an apartment you enjoy benefits such as joint insurance and if something breaks down that is fundamental such as a pipe or a window it is taken care of by the VVE. You do pay a monthly fee for this. You cannot pass this on to the tenant, so you have to include this in the yield calculation.
Hopefully these 7 steps will help you start making your first moves in the real estate market.
