Should My First Houston Home Be An Investment?

First time home buyers often make great home investors because they’re usually at an age where they don’t need a large living space to themselves and understand the importance of starting on an investing portfolio early.

Purchasing real estate in the Houston area is one of the most secure investments available when compared to stocks and bonds and most property increases in value overtime, giving real estate investors a larger return on their hard-earned money.

First time home buyers also realize the importance of diversifying their investment portfolio, knowing that traditional investments aren’t the only way to build wealth.

There are two types of first time home buyers, those that purchase a home for themselves to live in, while the others purchase investment properties and live off the income that they generate.

Not everyone is ready to live in a big house, and real estate investing makes a lot of sense for some first-time home buyers who don’t mind renting out a smaller space while building a significant investment portfolio.

There are plenty of options that will meet your income needs since the Houston area real estate market is filled with single-family homes, townhouses, and multi-family buildings to use as investment property.

For those who want to really jump into real estate investing, multi-family properties are a solid investment, allowing them to live in one unit and rent out the rest.

Multi-family properties let you collect rent multiple times on the same building, giving you a lot more income that you can increase each year to cover the amount you have to pay to live, save, and eventually invest in more property.

The areas in Houston that have the most available multi-family and investment properties include The Heights and Montrose.

You’re never too young to start investing in real estate. If you are able to purchase a home in the Houston area but not yet ready to move into the space, then the best thing you can do is purchase a home as an investment in order to successfully grow your wealth with time.

Things to keep in mind about investment properties:

1. It’s all about the location

That goes for the neighborhood as well as where in the building your investment property is.

You want to pick a location that you can rent out easily, that demands the rental prices you are looking for to make the investment worth it.

You also want a property that’s in a good location and maintains its value because the time will eventually come where you’ll want to sell your investment.

One important thing is to see homes in all different areas of Houston.

Look at what’s available in the Downtown Houston area. Travel to popular suburbs like The Woodlands and Katy. Compare areas in terms of what your money can buy you in what neighborhoods, and locate a place that matches with your short-term and long-term goals.

2. Double check the numbers

Make sure that you understand how expensive it is to buy and maintain property. There are costs associated with buying, maintaining, and holding a home that many first time home buyers overlook.

You should feel comfortable carrying the renting costs if you cannot rent it out immediately. Repair costs and upkeep are just as important to account for if you don’t want be caught off guard. Make sure that you know all the costs associated with owning an investment property, then talk to a realtor to learn the monthly income that you can receive from the property so that you cover all the costs.

This is one reason why it’s so important to purchase homes in a good investing area. You’re more likely to get better returns in areas like the Heights or Montrose instead of in the suburbs, where there are more available renters to be found. The easier it is for you to rent out your home in the Houston area, the more income you can collect for your investment property.

3. Have a financial cushion

You need cash on hand just in case something needs repair or you go without a renter for an extended period of time. There’s a common rule that helps you determine how much you’ll need on hand at any given moment, known as the 50% rule.

The 50% rule states that half of the income you collect on rent from a real estate investment will be necessary for the upkeep of your home, even before the mortgage is paid for the month.

Keep this in mind as you select properties and make sure that you always have an emergency fund available.

4. Have an escape

You probably won’t keep the investment property your whole life, so it’s important that you identify the signs that it’s time to sell.

Perhaps you’ll want to sell when the market is hot and your property will go for a lot more than you sold.

You may want to sell once you locate another investment property, or even a property to use as your main residence.

You might need to move out of the state and use the sale of your property to fund your move.

Whatever the reason, identify why you would sell your investment and when the time comes, act on your plan.

5. Is your property going to be difficult to sell in the future?

Try to purchase the best investment that you can.

Sometimes a property you’re interested in might meet your short-term income goals, but it might have a lot of problems associated with it. If you are looking to purchase a home that hosts one of these problems, you should know if the problem can be fixed.

If it is a problem with the home itself that cannot be repaired then your home will appreciate slower than other homes in the neighborhood and it might extend the amount of time that it takes for you to sell the home which could result in financial hardship.

Some tips to consider while purchasing your first property:

1. Purchase a property based on the analytical research, not your emotion

As a first-time homebuyer, you’re more likely to allow emotion to determine the property that you want to purchase.

When you buy your first home as an investment, you should look at it as such, instead of selecting a property where you over-capitalize on your purchase because of your emotional attachment.

The most important thing to do as a real estate investor is to base your decisions to purchase an investment property on analytical research.

Here are some questions that you should ask yourself before thinking about purchasing a property:

Will it provide the level of income that I require?

Is this home in the best location possible to attract quality tenants?

Will it appeal to owner occupiers and sustain its price in the long term?

When you are able to answer these questions with solid answers that meet your investing goals instead of choosing a home because you could see yourself raising a family there or because you like the finishes, then you’re basing your investment decision on financial gain instead of on personal feelings.

Investing is all about the bottom line, not the emotions, and in order to protect your first real estate investment, you have to detach yourself from what you purchase.

2. Plan for your success

In order to build wealth, you have to plan out what it takes to be a successful investor.

You want to make decisions that are not only good for the short-term, but for the long-term as well.

Take the time to plan out what your goals are, in terms of income, portfolio size, and total wealth.

When you do, you can determine a plan of action that ensures both your immediate success, and your success in the future.

Here are some questions to help you determine where you want to be:

What are my income goals? Am I looking for short-term yields or long term capital gains?

What types of property will meet my income goals?

How can I ensure that I meet my goals to get where I want?

3. Be decisive when you need to, otherwise take your time

As a first-time home buyer, you have to see enough properties in your market to make a decision on what to purchase or not.

People who rush into purchasing an investment are often the ones who get burned and then burn out.

Don’t be too impulsive when it comes to purchasing a house because this is an investment that you’ll live with for the years to come.

Learn how to locate solid investment properties, understand when the proper time to buy is, and never feel rushed into purchasing a property when it isn’t the right time.

On the other hand, when you find the right investment property that meets your short-term and long-term goals, you have to know when to act!

It’s easy to become overwhelmed by the amount of properties on the market and go through paralysis by analysis.

There’s a lot of property in the Houston surrounding areas with new developments being established all the time.

When you find a property that meets your needs, don’t procrastinate.

Otherwise you can miss out on a great opportunity and someone who is more decisive will come along and snag the property before you.

There’s no way to know everything before you make a commitment, so sometimes the best way to learn is to just start playing the game.

4. Learn how to properly manage your cash flow

 Acquiring a property and holding it comes with many costs that a beginning investor can easily overlook.

Luckily you can turn to professional accountants and real estate investors who can help you determine what exactly you’ll be getting into financially when you purchase a property.

The two biggest considerations when buying a property are:

1. Can I afford to hold on to the property that I purchase? And…

2. If I cannot, will I be able to manage any shortfall?

Every real estate investment will generate income, but you have to be aware of if it will cover all of the costs associated with owning the property.

If your investment doesn’t cover all of the costs of holding the property, will you be able to pay for the difference?

Can you still manage if you don’t find a renter quickly, or if there are maintenance issues with the property?

Roughly 10% of the property value should be allocated for the cost of holding the property including taxes, insurance, and maintenance.

Whenever you look at a potential investment property, you should keep these costs in mind and determine if you’ll be able to afford the investment and can make adequate allowances.

Make sure that you underestimate your income and overestimate your expenses so that no matter what occurs, you’re able to incur the costs of holding a home.