Buying a Rental Property – 10 Surprisingly Simple Steps
Buying a rental property, especially your first one can seem daunting, but if you take these simple steps, it will feel far less so. Even if you’ve been down this road before of buying a rental, a checklist or step-by-step process can make life easier since it is really is easy to forget something.
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1. Getting Started with Buying a Rental Property – Education
First of all, it’s important to understand the basic fundamentals. Learning the fundamentals is essential for real estate investing and buying a rental property. Running the numbers will dramatically reduce your risk. Also worth noting here, is a warning around the hot tip or once in a lifetime investment opportunities. While they seem great, sadly, they are often not. Unfortunately, get rich quick schemes are common in real estate. Proceed cautiously because if it appears too good to be true, it probably is. Check with the Better Business Bureau if you have any concerns at all so you are as educated as you can be.
It takes preparation and running the numbers to analyze your deals properly prior to buying a rental property. Rather than learning the hard way through a bad experience, you can consult with other people and ask for advice when you have questions. Joining a Real Estate Investment Club is a good way to begin these conversations.
2. A Good Team Makes all The Difference
As you learn more about real estate investing through blogs, books, and seminars, you will hear the benefits of forming a team of advisors. Investing in real estate should not be a solo endeavor. If you are just getting started and don’t know how to begin, meet with a property manager. Property managers know a great deal about your market and will have intimate knowledge of your neighborhood due to their day-to-day first-hand experiences. Quite simply, property managers are fabulous experts to consult when buying a rental property.
Other team members you should start with are your real estate agent, accountant, insurance agent, and attorney. Your agent will help you find great deals, assess your neighborhood, and help you through the process of finding and closing on a property. In some cases, your property manager may also offer to represent you as a real estate agent since most states require a property manager to be a broker anyway.
A real estate attorney is often overlooked in the process. Investing is a business and you will want to talk to your attorney about protecting your assets with an LLC or corporation.
3. Initial Search for Properties in Your Area
The best way to get your feet wet is to get out there and begin looking at properties. Nothing will educate you more quickly than getting out there and learning about your neighborhood and the market conditions. Seeing properties and beginning to run the numbers is immensely educating because you will start to see patterns. Most of all, you will learn when the numbers just don’t work when buying a rental property. Or, conversely, when they do work and what to look for so you can repeat the performance.
4. Run the Numbers Before Buying your Rental Property
Finally, it is time to run the numbers. You are now at the starting block and getting yourself set to make an offer on a property. Through reading, reviewing and getting out there, you’ve educated yourself and might have even found some attractive deals. Next, you want to use solid data and run the numbers. This is probably the most important part of the investment purchase process. An investment property needs to cash flow and needs to be evaluated as such. Real estate investing is a business and requires black and white information in order to make your business decisions.
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Having trouble determining your rent? Check out our blog post called “How Much Rent Do I Charge?”
5. Your Financial House Needs to be in Order
Take a critical look at your financial situation and what finances you have available. There are a number of ways to finance a property. One option is to save up cash for a down payment and take the traditional route through a bank. Treat this the same way you would secure financing for your own home.
Some rules on financing for your own dwelling vs. a rental property can vary, especially when you are dealing with condos. Banks will have their own rules and concerns about condos, and investment properties in general. Fannie Mae is the governing body that sets the direction for all of them. The Federal National Mortgage Asociation (FNMA), or better known as Fannie Mae, backs most home mortgages in the U.S.
Related: Should I Invest in a Condo or a Single Family Home?
6. Zero in on a Property to Buy
Since you’ve researched your neighborhood ahead of time and found out what kind of financing you can work with, it’s time to really get going on the property hunt. There is a guideline called the 100/10/3 rule. The rule is broken down as follows:
Run the numbers and research 100 investment properties, find 10 that meet your criteria and go look at them. From there, find three suitable properties to make offers on. Keep in mind that an offer requires earnest money and any offer you make is an intent to buy.
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7. Make your Offer on the Property you Want to Buy
You have found the perfect investment property, and as a result, it’s time to make an offer. This is a serious step. Pre-approval is generally required for a loan at this point. With a pre-approval, the seller knows you are serious about buying and financially capable of doing so. A lot goes into to making an offer and you need to make your real estate offer stand out. Most noteworthy, this is where true negotiation tactics take place and where you can quickly make thousands of dollars. Imagine getting this property you had eyes on for 10 or even 20 percent under the assessed or appraised values.
The team around you plays a part in this step as well. Your real estate agent is likely to be the one working the negotiations directly with the seller, according to your wishes. If you’ve worked without a real estate agent, you will definitely want to call the attorney in to look over the purchase/sale contract, which is the offer letter to make an offer on the property. When making your offer, and when your agent or attorney writes this purchase/sale contract, you will want to put contingencies in place. Moreover, a contingency is a way for you to cover your bases from the unexpected or ensure certain conditions are met before you take ownership of the property.
8. Do Your Due Diligence
Welcome to the due diligence phase. If you made it this far, that means you have an accepted offer! This is not a stepped to be missed when buying a rental property. The due diligence process is your final chance to make sure you are getting the amazing property you think you are getting. During this period of time, your purchase goes “into escrow” and is between the accepted offer and the final close of sale.
As discussed in Step #2, there are many valuable team members, and the due diligence phase is where you need to bring out a few more. These additional team members are a home inspector and insurance agent. For extra protection, hiring a roofer to inspect the roof or a drain/sewer expert to help you determine if Orangeburg pipe or other sewer problems may exist in your home is a good option.
Along with the new folks you brought while buying your rental property, your real estate agent will be with you throughout the closing of your home. In addition, your property manager can help you strategize rent charges and even start advertising your rental. The property manager may even be allowed to show renters the rental while it is in escrow. Furthermore, early showings give you a great head start and you could have a renter by the time you close on the property. No need to have your property sit vacant.
9. Final Walkthrough and Inspection
Lastly, there is the final walkthrough. This is your opportunity to confirm any required repairs the seller agreed to were completed and to your satisfaction. Remember, the final walkthrough is not a home inspection, rather, it is an opportunity to uncover any last minute issues. The final walkthrough is the last time you visit the house before ultimately purchasing or walking away from it. Your walkthrough could be five days before closing or as short as a few hours before closing.
10. Close on the Property
Finally, you’ve navigated through the final processes of closing and you are happily signing documents with your lender and the seller. Check out this post on Property Fees: The Hidden Costs of Your Real Estate Investment so you are well aware of the fees you will pay during the close and purchase of the property.
Congratulations! You have just succeeded in buying a rental property due to your persistence and thoroughness! Finally, you have done what many people only dream of doing. Most of all, you are on a path to a more secure financial future. Now it is time to get yourself organized. Follow these three steps after purchasing your investment property.
1) Get Organized
2) Plan and Prepare
3) Advertise Your Property
Check the related blog So You Own an Investment Property, Now What? 3 Steps You Must Take! so you can learn more about each of these steps mentioned above.
Don't forget to check out our free rental property calculator. This will be a valuable tool in your arsenal as you analyze your existing or potential rental properties. Benefits: Thank you for your ongoing support and happy investing! – – – –
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Before you leave:
Disclaimer: The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, AssetRover, Inc. recommends consultation with a qualified tax advisor, CPA, Financial Planner, or Investment Manager.
Don't forget to check out our free rental property calculator. This will be a valuable tool in your arsenal as you analyze your existing or potential rental properties.
Thank you for your ongoing support and happy investing!
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