Investing in real estate changed my life, and I’m confident it can change yours too. When I bought my first investment property, I will admit I was unsure where to start, and nervous about making such a large investment and having a mortgage on a house I wouldn’t even live in. But now that I have more experience under my belt and properties in my portfolio, I decided to create a complete guide to help other investors purchase their first investment property.

In this guide, you’ll learn how much it costs to get started, how to search for properties, what to look for when choosing a property to buy, and all the steps required to buy your first investment property. Let’s get into it.

How Much Does it Cost to Purchase a Rental Property?

While some real estate gurus claim that you can purchase a rental property for as little as $5,000 down, in my experience that is not the norm. For a typical single family home investment property, you should expect to budget about 30-40% of the home’s value, depending on its condition. For example, if you are looking at homes in the $100,000 range, then you can expect to spend about $30,000 to $40,000 to purchase the property. If you are looking at more expensive homes in the $1M range, then that number climbs to $300,000

For a typical single family home investment property, you should expect to budget about 30-40% of the home’s value, depending on its condition.

This 30-40% range is based on my first hand experience, and may differ depending on your specific situation. These costs include a 25% down payment, 5% in closing costs, and 5-10% in first year maintenance. This amount of capital will also help you get pre-approved for a loan, which typically must be completed before submitting a bid on a property. While it is possible to bid with a Proof of Funds and then organize a loan, I would recommend getting the pre-approval completed first if you are just getting starting investing in real estate.

How Do I Get Pre-Approved to Purchase a Rental Property?

Having a pre-approval letter in hand allows you to bid on investment properties and show sellers and their real estate agents that you are a serious buyer. Obtaining a pre-approval letter is a slightly tedious but overall straightforward process that can be done completely online through companies like Rocket Mortgage or Flagstar Bank, which is the lender I use. The pre-approval process typically consists of 4 steps:

Step 1: Submit Your Application

Once you find a lender you like, navigate to their mortgage application process and follow their application process. Most lenders make the initial submission experience very intuitive.

Step 2: Credit Check

After your application is submitted, the lender will conduct a credit check using the information you provided. By doing this, the lender is confirming that you have an acceptable credit history and that there is low risk associate with lending you money.

Step 3: Provide Documentation

After clearing your credit check, the lender will typically ask you to provide financial documentation, such as your most recent W-2, three months of bank statements, and two most recent pay stubs. This is to show the lender a more complete view of your financial status.

Step 4: Receive Pre-Approval Letter

Once the lenders documentation requirements are satisfied, they will use all the information you provided to give you an estimate of the total amount of money they are willing to lend you, along with the interest rate and other terms. This estimate will come in the formal of a formal pre-approval letter which will come in handy when you decide you want to make an offer on a property.

It’s important to not that pre-approvals only last for 60-90 days at a time, and if you don’t find a property before that time constraint, you may need the lender to refresh the letter. Luckily, if you stick with the same lender, this is a straightforward process provided nothing material has changed with respect to your credit and finances. And if you read through the rest of this guide, you’ll be in the best position possible to find your first investment property within that 90 day window.

How Do I Find a Rental Property?

Once you have saved up enough money to invest in real estate and you have completed the pre-approval process, it’s time to find properties to invest in. While there are many tools specific to real estate investing, in my experience the simplest way to find properties is through Zillow. Zillow is an online real estate database that is free and easy to use. Additionally, Zillow has all the tools new and experienced real estate investors need to screen for investment opportunities.

Zillow has all the tools new and experienced real estate investors need to screen for investment opportunities.

What Should I Look for When Searching for a Rental Property?

When screening for properties, make sure to balance between broad and strict criteria. If your geographic area and price range are too wide, you may get lost in a sea of options. If your criteria are too restrictive, it may feel impossible to find a property to invest in. Here are four simple criteria I use when screening for homes with $25,000 to invest.

Criteria 1: Geography

When searching for your first rental property, it’s important to consider whether you want to invest in your home geography, or out of state. While investing out of state may seem intimidating, I can tell you from my own experience that the purchasing process for an out of state property is not much different than purchasing a property close to home. The biggest benefit of doing so is the flexibility to invest in properties priced within your budget.

For example, I live in Southern California where single family homes are routinely priced in the $2M range. While these homes are desirable, they would require hundreds of thousands of dollars just to acquire and would not generate positive cash flow. In Tulsa, Oklahoma on the other hand, three bedroom homes are routinely listed for under $100,000 and rent for around $1,100/mo as of the time of this writing. These properties require much less capital upfront, and typically provide immediate monthly cash flow.

Criteria 2: Price

Even in Tulsa, Oklahoma, home prices can vary widely. Therefore, it’s important to set a price filter when screening for properties using databases such as Zillow. To find your maximum budget, take your total investable capital and divide it by 30%. For example, if you have $25,000 to invest, and divide that by 30%, that would imply a maximum budget of $83,333.

Criteria 3: Size

While screening for price will filter out properties above your budget, your search will still be cluttered with homes that are priced too high for their size. For example, with a maximum price of $83,333, you may find a mix of one and two and three bedrooms, or homes with anywhere between 700 sqft and 1,200 sqft. Therefore, it’s important to include your desired screening criteria. When looking at properties in the $75,000 to $100,000 range, I typically set size criteria for a minimum of 3 bedrooms and 1,000 sqft.

Criteria 4: Condition

Although size criteria will help filter out homes that are priced to highly for their size, there will still be many properties that are in poor condition, sometimes needing tens of thousands of dollars in repairs. Unfortunately, databases like Zillow do not include standardized inspection criteria like you may see on auction sites for cars or miscellaneous goods on eBay, like “Fair,” “Good,” or “Excellent.”

Luckily, with the first three criteria mentioned above, the database results should be narrowed down enough that you should be able to manually review each listing and develop a general sense of the properties condition based on the images and description provided by the seller. It is always important to have a potential investment thoroughly inspected by a professional, which is why it’s important to find a good real estate agent to help guide you through the home buying process.

How Do I Find a Good Real Estate Agent?

Finding a good real estate agent can make the process of buying your first investment property much smoother. Good real estate agents are familiar with their local market and have relationships with other housing industry professionals in the area such as contractors and lenders. And luckily it’s never been easier to find a good real estate agent simply by doing some research through Google.

Most real estate agents these days have robust online profiles through Google’s business account feature along with detailed client reviews. When investing in my first few investment properties, I spent time gathering a shortlist of the highest rated real estate agents in the area and reaching out to them for quick introductory calls to see if there was a fit between the both of us.

When having these calls, it’s important to find out if the agent you’re looking at has specific experience with your situation. Are they supportive of you investing in your first real estate deal, or do they look down on you and prefer buyers with more experience? Do they work with investors from out of state, or mostly with local homebuyers? These qualities are important to align on between you and your agent to ensure a good working relationship for your first deal, and hopefully, many other deals in the future.