Greetings, AssetRovers! Buying a rental property, especially your first one, can be daunting from the get go. Even if you’ve been down this road before, a handy checklist or step by step process can make life easier. Before flying a commercial jet, pilots always use a checklist to ensure everything is in working order.
Processes, 12 steps, 8 steps, etc., are everywhere in business and aren’t going away anytime soon. Why is that? Because they work. What a better way to gallantly travel through the investment purchase process than with a tried and true list of steps you can follow in order to be successful!
Check after the break for the list below, and check out the 10 simple steps to buying a rental property!
On Your Marks…
1) Get Educated in Real Estate Investing
As with most new ventures in life, it’s important to understand the basic fundamentals. This is especially true for real estate investing. You will want to learn how you can “run the numbers” to get a great deal financially. Most potential investors fail from the start because they follow a “hot tip” or “once in a lifetime investment” without learning the ropes first. It takes preparation and running the numbers to analyze your deals properly. Another helpful education resource that we recently discussed is Joining a Real Estate Investment Club.
2) Form Your Core Team
As you learn more about real estate investing, your educational books, mentors, and seminars will likely tout the benefits of forming a team of advisors. They are certainly right since real estate investing is not a solo endeavor. If you are just getting started and don’t know how to begin, meet with a property manager. A property manager knows a great deal about your market, will have intimate knowledge of your neighborhood, and will even manage your property for you.
Other team members you should start with are your real estate 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, but wait a minute, not so fast! Investing is a business and you will want to talk to your attorney about Protecting Your Ass(ets) with an LLC or corporation.
3) Initial Search for Properties in Your Area
Get out there and take an initial look at some properties! You certainly can “window shop” when you are searching for investment properties. It’s free to look, especially with online tools out there now. Nothing will educate you quicker than getting out there and learning about your neighborhood and market conditions. In fact, nothing we’ve suggested so far really costs any money. Most of it is free–even the attorney will often do a free consultation if it’s brief and leads to potential business down the road. You can take your real estate agent (or property manager in some cases) and check out the physical properties you checked out online or in local ads around town. Find out what your criteria is and work with your agent.
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4) Run the Numbers
Run the numbers, but don’t run away yet! You are now at the starting block and getting yourself set to launch on a property. You’ve educated yourself and might have even found some attractive deals. Next, you want to use solid data and running the numbers is 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 cold, hard facts to help make your business decisions.
If you are having troubles evaluating rents, check out our blog post called “How Much Rent Do I Charge?”
5) Secure Your Finances
Take a critical look at your financial situation and what finances you have available. There are a number of ways to finance a property. If you have some cash saved up for a down payment and want to 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, but Fannie Mae is the governing body that sets the direction for all of them. The Federal National Mortgage Asociation (FNMA), better known as Fannie Mae, backs most home mortgages in the U.S. After the mortgage crisis, ol’ Fannie has tightened up quite a bit.
Related: Should I Invest in a Condo or a Single Family Home?
6) Zero in on a Property
Since you’ve researched your neighborhood ahead of time and found out kind of financing you can work with, it’s time to really get going with the property hunt. There is a guideline called the 100/10/3 rule. The rule is broken down as follows:
Run numbers and research 100 investment properties, find 10 that meet your criteria and go look at them. From there, find three suitable properties and make offers on them (one at a time please, you don’t want to end up owning all 3!) Or, maybe you do. Maybe you have cash to burn and they accepted your aggressive offers. Just keep in mind that an offer requires earnest money and is an intent to buy. If the seller accepts your offer, you’ll be going into escrow and you’ll be a proud (or frightened) owner soon.
7) Make Your Offer
Once you’ve found that perfect investment property (or three), it’s time to make an offer. This is a serious step and often means you are committing to buy the property if your specific demands and pricing is met. You typically need to be pre-approved for a loan at this point so the seller knows you are serious about buying and financially capable of doing so. There’s a lot to making an offer and you need to make your real estate offer stand out. 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.
Your team 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. 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! The due diligence process is your final chance to make sure you are getting the amazing property you think you are getting. This is also the period of time where 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 we haven’t discussed in our investment purchase series. These team members are a home inspector and insurance agent. You may also want a roofer to inspect the roof or a “rooter”, who is a drain/sewer expert to help you determine if Orangeburg pipe or other sewer problems may exist in your home.
Along with the new folks you bring in during this purchase process, your trusty real estate agent will be with you throughout the closing of your home and your property manager can help you strategize rent charges and even start advertising your rental. In some cases, if you, or your real estate agent, has a good relationship with the seller’s agent, the property manager may even be allowed to show renters the home while it is in escrow. This gives you a great head start since you could have a renter by the time you close on the property!
9) Final Walkthrough and Inspection
At this point, you should feel great about your decision and you’re already pulling contingencies off of your purchase/sale contract. Before getting too excited, you want to get over to your future property and do one last check. This last check is called the final walkthrough, and this where you can check up on any repairs the seller may have done or uncover any last minute issues. The final walkthrough is the last time you visit the house before ultimately purchasing or walking away from it. It could be five days before closing or as short as a few hours before closing.
Remember, the final walkthrough is NOT a home inspection! You really should have done this already, and if you hired a home inspector, he/she might have uncovered some repairs that needed to be done. This is where you check up on those repairs to ensure the seller completed those to your satisfaction. No longer is it the time to negotiate repairs or uncover major issues. You want to get in there, ensure the property is in the condition you expect, and make sure the property isn’t suddenly 6 feet under water.
10) Close on the Property, Finally!
After the long process of finding and financing your property, running the numbers, negotiating and landing that deal, and doing your due diligence and final walkthrough, it’s time to go to the bank and close on your next investment property. By now 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 to ensure you are well aware of the fees you will be paying during close and purchase of the property.
Congratulations! You now are a proud owner of an investment property Now that you’re done, don’t go off to a tropical island and start sipping piña coladas just yet. 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! to learn more about each of these steps mentioned above!