2025 could finally be your year. If you’ve been waiting to jump into the wild world of investing in real estate, get ready to take the plunge! Preparing to buy your first rental property requires careful planning and a well-thought-out approach. Here’s a step-by-step guide to help you get ready:

8 Steps to Prepare for Your First SFR Acquisition

Step #1 – Review Your Financial Health

• Check your credit score: Lenders will assess your credit score to secure a mortgage. Aim for a score of at least 620 for conventional loans, though higher scores will get you better interest rates. Remember, if you’re buying with a spouse or partner, the lowest credit score will be what lenders go by.
• Save for a down payment: Most rental property purchases require a down payment of 20-25% of the property’s value. Start saving and factor in additional costs like closing fees.
• Analyze your debt-to-income (DTI) ratio: Lenders typically want a DTI ratio under 35%, including your new rental property’s mortgage. You need to pay down existing debt if your ratio is too high.
• Build an emergency fund: Property ownership comes with unexpected expenses. An emergency fund will help cover repairs, vacancies, and other surprises.

Step #2 – Learn About SFR Investment

• Understand the market: Research the areas where you want to buy a property. Pay attention to local rental demand, median rent prices, job growth, schools, amenities, and overall property values. Review real estate data from years past leading up to the present. It’ll give you a better idea of where things are headed.
• Learn property management basics: Will you manage the property yourself or hire a property management company? Either way, educate yourself on laws, leases, and handling maintenance issues.
• Familiarize yourself with ROI and other financial metrics: Learn how to calculate the return on investment (ROI), cash flow, cap rate, and other key metrics to properly assess deals and performance.

Step #3 – Start a Property Investment Strategy

• Define your investment goals: Are you looking for long-term capital appreciation, steady rental income, or a combination of both? Your goals will influence which properties and locations you choose.
• Create a budget: Establish how much you can afford to spend. Consider the purchase price and ongoing expenses like taxes, insurance, maintenance, and potential vacancies.

Step #4 – Research Financing Options

• Consider your mortgage options: Investigate traditional loans, FHA loans (if buying a 2-4 unit property), and portfolio loans (offered by lenders for investors). Understand the pros and cons of each.
• Get pre-approved: Before you start shopping for properties, getting pre-approved for a loan helps you understand your budget and shows sellers you’re a serious buyer. Just remember that the maximum pre-approved amount isn’t what you should leverage.

Step #5 – Build a Team of Experts

• Contact a turnkey partner: Turnkey companies (such as ourselves) have already identified solid investment markets, purchased properties, renovated them, and often have management and residents already in place. This can be the best way for new investors to start!
• Work with an accountant or financial advisor: These pros can help with tax planning and structuring your purchase for maximum efficiency.

Further Reading: 15 Compelling Reasons to Consult a Financial Advisor

Step #6 – Evaluate Potential Properties

• Look at cash flow: Ensure that the rental income will cover your mortgage, property taxes, insurance, and maintenance costs while still leaving room for profit.
• Consider location: The property should be in a desirable location close to transportation, schools, shopping, or major employers.
• Factor in repairs and renovations: Determine whether the property will need renovations to increase its rentability. Factor the costs into your budget.

Step #7 – Understand the Tax Implications

• Learn about tax deductions: As a property owner, you can deduct mortgage interest, property taxes, maintenance costs, and depreciation, significantly reducing your taxable income.
• Set up a legal structure: Consider whether you’ll hold the property in your name or through an LLC. An LLC offers some liability protection and tax benefits.
• Consider tax-deferring options: Investors can defer capital gains taxes in several ways, including through a 1031 Exchange and by investing through a self-directed IRA (SDIRA).

Step #8 – Stay Flexible and Patient

• Know your timeline: Finding, financing, and closing a property can take time. Be patient and stay flexible if deals don’t go as quickly as expected.
• Be ready to adjust: The real estate market is constantly changing. Stay informed about trends and be willing to pivot your strategy as necessary.

By following these steps and being thorough in your research, you’ll be well-prepared to purchase your first rental property in the new year. Take your time to build a solid foundation, and approach the process with a long-term view.

Start investing with REI Nation, where you invest and we handle the rest!