Real estate investing can be a great way to build wealth and achieve financial freedom. However, it is important to do your research and start small, especially if you are a beginner. If you want to buy your real estate property, this is a great time to learn. First, you will need to understand the real estate landscape. 

There is more to investing than simply buying property. Real estate is all about making smart choices. I have personally helped people, young and old alike, become millionaires through simple real estate knowledge. This blog post will walk you through the process of building a real estate portfolio in 5 steps.

How to Buy Your First Rental Property: 5 Steps

My ultimate goal has always been teaching people to build wealth for the Kingdom. I know through over 30 years of experience that one of the best ways to build wealth is through investing in real estate. I firmly believe that anyone can become a successful real estate investor and change their financial future as long as they are willing to learn. All it takes is five steps. 

1. Save for a Down Payment

2. Improve Your Credit Score to Get the Best Mortgage Rates

3. Buy a Home to Live in and Start Building Equity

4. Use Your Home Equity to Finance Your Next Property

5. Build a Real Estate Portfolio

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1. Save for a Down Payment

The first step to building a real estate portfolio is to save for a down payment. The amount of money you need for a down payment will vary depending on the type of property you are buying and the lender you choose. However, most lenders require a down payment of at least 20%. There are many ways to save for a down payment. You can set up a dedicated savings account and make regular contributions. You can also consider selling assets, such as a car or jewelry, to raise money.

I often tell the story of a young man in Dallas who came to me overjoyed and ready to begin his real estate investing journey. The only problem was, he didn’t have any money saved! I challenged him by saying, “Come back to me when you have $10,000 saved up.” Six months later, he called me and I walked him through the process of buying his first investment property. He went from owning zero properties to owning 63 investment properties. The advantage you have today in this market is a down payment can be as low as three percent. So, let’s think about that for a minute. That means if you’re buying a 100,000 dollar house, that would be 3,000 dollars. 

Not as scary and intimidating as you might think, right? I recommend you start by calculating how much you can comfortably save each month and how long it will take you to save the amount needed for a down payment. This will give you a firm time frame and the ability to adjust your savings if needed. You may even want to look into a high-yield savings account that will help you gain more interest than a regular savings account.

2. Improve Your Credit Score to Get the Best Mortgage Rates

Your credit score is a major factor in determining your mortgage interest rate. It basically determines your buying power. A higher credit score will qualify you for a lower interest rate, which will save you money over the life of your loan. There are so many methods to choose from when you consider how to improve your credit score. Paying your bills on time and keeping your credit utilization ratio low are two great ways to do it. You can also check your credit report for errors and dispute any inaccurate information.

The last thing you want is to be denied or forced into paying extremely high-interest rates as a result of poor credit. While it may take some time to bring up a low credit score, it is doable if you begin by taking an in-depth look into your credit report. You should ultimately aim for a credit score above 640. A bad credit score isn’t the end of the world, and it certainly doesn’t mean you can’t become a real estate investor. However, it’s important that you identify any credit issues beforehand and productively work towards a solution. That way, you’ll be in good shape when it comes time to finance!

3. Buy a Home to Live in and Start Building Equity

Once you are pre-approved for a mortgage, you can start looking for investment properties. There are many factors to consider when choosing an investment property, such as location, condition, and price. It is important to work with a qualified real estate agent who can help you find the right investment property for your needs.

People usually have two options when it comes to finding a roof over their heads, either renting or buying. If you’ve decided to rent, you’re already paying a monthly expense to your landlord. That’s a big chunk of money going out the door every single month. When you rent, you don’t have the ability to build equity. Therefore, you’re missing out on a valuable asset. Why not use your expenses from rent and put it towards your own home so you can build equity? If you’re still not sold on the idea, stay with me because this leads right to step four.

4. Use Your Home Equity to Finance Your Next Property

One of the best ways to finance your first investment property is with a home equity line of credit (HELOC). A HELOC is a type of loan that allows you to borrow against the equity in your home. This means that you can use the money from your HELOC for any purpose, including buying an investment property. There are many benefits to using a HELOC to finance your investment property. 

First, HELOCs typically have lower interest rates than other types of loans, such as personal loans or credit cards. Second, HELOCs are flexible, so you can borrow only the money you need and pay it back at your own pace. However, it is important to note that there are also some risks associated with using a HELOC. For example, if you default on your HELOC, your lender could foreclose on your home.

A home equity line of credit functions the same way a credit card does. Essentially, you’re allowed to access a certain amount of funds for a limited amount of time. There are many pros and cons involved with opening a HELOC, however, when done the correct way, it’s a great alternative funding source that can be used to purchase an investment property. 

Before you jump into using a HELOC, I strongly urge you to do your research. Those who get burned are often the ones who jump in headfirst without any prior knowledge or understanding. Once you’ve acquired a HELOC, you can use it as a down payment on your first investment property.

5. Build a Real Estate Portfolio

If you’ve made it this far in the process, I commend you. It’s not easy getting to this step, but this is the fun part! Now that you have one property under your belt, it’s time to use the lessons and equity from your first home to get the second. And then the third. And so on! This is when you get to take the knowledge, understanding, and wisdom you’ve gained throughout the process to start building your portfolio. 

At this point in time, you should own a personal home and one investment property. When it comes time to look for your second investment property, do the following. Take the same amount of money you put in the first house, pay that house down, either obtain a HELOC or refinance, and put it towards your next investment property. Now all you have to do is rinse and repeat!

Buying your first rental property can be a daunting task, but it is important to remember that you don’t have to go it alone. There are many resources available to help you get started. By following the five steps outlined in this blog, you can increase your chances of success in real estate investing.

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Note: This post was originally published on Mar 11, 2020, and has since been revamped to ensure accuracy and comprehensiveness.