How to Buy Your First Rental Property
I’m going to describe the various steps to purchase your first Rental Real Estate Property. Now that you have decided to become a Real Estate Investor, you are now asking “What do I actually do?”. We’ve all done it; listened to some ‘expert’ that made investing in Real Estate sounds so easy that a child could do it. Well the answer is that it “is possible”. But realistically a road map is useful. I hope to provide such a beginning road map here.
Some background first: I recommend becoming a member of your local Real Estate Investor Association. They are called different things in different areas, sometimes called Real Estate Investment Club, sometimes the acronym: REIA and lots of other names. In the area where I live there are also networking breakfasts and focus groups. It’s all about networking!
You are the average of the 5 people you associate with. So, getting around people who are buying and selling real estate properties raises your skill level because you can ask questions. Learning from other people’s mistakes saves you from making those same mistakes (at least we hope it works this way).
This is NOT a complete description of what needs to happen. Yes, I will gloss over some of the hard parts, but I will at least tell you where the hard parts are. So, when you begin, everything is hard. For example, closing on the property using a title company (terms described below). The first time you close it is scary. The second time, you realize it’s just about signing a bunch of papers that gives away your first born. But it’s easy to do, just a lot of signatures and writing (potentially) a large check. By the time you get your 4th or 5th house, none of this will scare you. It’s just “oh, I have to go to closing”.
The first property is the hardest. The second is easier, because you have done most of it before. By the time you get to 5 or 6 it gets much easier, you’ve seen most of it.
Major Steps
Here are the steps that are the highest level.
- Find a property
- Estimate the ARV (After Repair Value)
- Estimate the Repairs
- Negotiate and get under contract
- Get Financing
- Close (Actually purchase the property)
- Rehab the property (fix it up)
- Rent it
- Ongoing Rental Property Management
- Repeat
1 – Finding a property
Back to the topic at hand. The first thing is to find a property. I’ve already written a blog on 50 ways to find a property. A couple of good ones are:
- Run around with a Realtor that uses the MLS (Multiple Listing Service),
- Calling the Bandit Signs, you see everywhere. Even though the sign says “We Buy Houses”, they also sell them too.
- Calling “For Rent” ads on Craigslist (yes, For Rent! Why? Landlords are the most frustrated when they have to Evict and re-Rent a property.
- Networking groups.
2 – Estimate the ARV
After you’ve found a property you are potentially interested in, you will need to determine how much you can pay. NOTE: this is NOT what the seller wants you to pay. You will need to calculate the ARV (After Repair Value). This is how much the property is worth AFTER you have fixed it up. You need to become familiar with the neighborhoods you want to buy in. See the blog post on how to estimate ARV for this process. This gets you what you can sell it for (aka After Repair Value).
3 – Estimate the Repairs
Now you must look at what the house needs in repairs; after all it is called After repair value. This can be done a couple of ways, but walking thru the house is the easiest. You can also have someone else walk thru the house, maybe with a video recording, attempting to look ‘everywhere’. From this walk thru you will look at what repairs are needed to get the property to match or be better than the houses in the neighborhood. You don’t want to go too far above or below the rest of the houses.
The tool https://rehabestimator.wpengine.com will help with this because it is easy to use and already has the prices in it. From these two numbers ARV and Repairs you can calculate a cash purchase price. If you want to use the Cashflow method vs the Cash method, then it’s more complicated and described in one of the other blog posts.
4 – Negotiate and Get under contract
Now that you know what your Maximum Allowable Offer (MAO) is you can start to negotiate. This is a process whereby you work with the seller to determine if you can buy the property. Assuming the seller is motivated and chooses to sell at (or below) your MAO, you get them to sign a purchase agreement (yes, you want to provide that document). Once the property is under-contract now you can set up for closing.
5 – Get Financing
Unless you use some form of seller financing you will need to line up financing. This can be your own money (boo, hiss), a bank, private money lender, hard money lender, seller finance, or partnership. These are also described in other blog posts – this is one of the hard parts.
6 – Closing
Now that you have a purchase agreement (step 4) and financing (step 5) you can close. This is the word used to indicate transfer of title. I strongly recommend using a Title Company that is investor friendly. Buy the title insurance but not the closing insurance. Closing is the process where all the money changes hands (via the title company escrow accounts) and the title gets transferred. This sound complicated but it’s only scary the first time or two. Also, it is scary to write a check for $30,000 or more. But once you done it a couple of times it gets a lot easier.
7 – Rehab the property (fix it up)
Now that you own the property (don’t do ANY work on the house until you own it – any work you do becomes the sellers if closing falls thru). You will need to find several of the trades (plumber, carpenter, drywaller, roofer, etc.) to do the work. It is especially useful to belong to a Real Estate Investment group at this point because you ask for a good roofer and usually, they are good. Ask for quotes, etc. Check the references.
So, you get the property fixed up. This could be to be just livable (low end neighborhood) or high end (better neighborhood). You can do some of the work yourself to save money and to learn how. Remember, your long-term goal is to own real estate, not have another job. Realistically your job is to write checks and make sure everyone is doing their job. This is also a hard part to be sure you get what you pay for.
8 – Rent it
Finally, you have a property that is Rent-Ready. You can try to rent it yourself or use a property management company to rent it for you. Normally, that will cost ½ to 1 months rent. If you do it yourself, be sure to get a good rental application from an experienced investor. Do the checks with the current and prior landlords, current and prior job (are they employed?) and eviction/criminal checks.
9 – Ongoing Rental Property Management
You can manage the property itself or you can hire a property management company to manage it for you. It’s relatively easy to manage 1 to 3 properties yourself. Then it gets more difficult. Somewhere around 15 it becomes a real challenge and you will need to have a property management company. This is where the really good stories come. Most tenants are great. They pay on time and keep the place up. A few will be problem children, won’t pay on time, and/or damage your property. No respect. Time to move them on.
10 – Repeat
Once you have your first Rental, it is time to go get some more. The first is always the hardest, the second is difficult but it gets much easier from there. Once you have 4 to 6 it gets pretty easy to get another. To go from 5 to 20 is about as much work and emotional energy as it was to go from zero to 4. The first couple may or may not make money, but you are learning. Learn from the mistakes and try not to make them twice. But keep going. I suggest as a first target is to get 5 then get 20.
And that is How to Buy Your First Rental Property.
Hopefully, this has given you a framework to How to Buy your First rental.
Scott Krusemar