Starting a real estate investing business is an exciting endeavor but also one which requires the right skills and knowledge in order to succeed. To help you out on the journey of becoming a successful real estate investor, we have put together a guide on the steps you need to take to buy your first rental property.
Step 1: Set Up Your Budget
Financing an investment property is a crucially important aspect of becoming a real estate investor and one which you should tackle first. Before doing anything else, you should sit down and do the math to see what kind of money you have at your disposal for investing in real estate. How much do you have in the bank and how much can you afford to spend on a rental property? What portion of your salary can you invest in your real estate investing business each month? What other sources of financing do you have access to?
Mortgage is the most common method of financing the purchase of a rental property, so you should explore your options there as well. However, keep in mind that banks generally require a minimum down payment of 20% of the property price for investment properties.
So, unless you are already rich, you have a lot of work to do on your personal finances before you can buy your first rental property, the right way that is.
Step 2: Secure Financing for Your Rental Property
The second thing to start working on is the financing of your income property. For this purpose, go to several banks to check if you are eligible for a mortgage loan and what conditions different banks offer. Remember to visit small local banks as well as larger national banks as many times the former offer better rates to real estate investors.
Once you have decided on a bank, start working on getting pre-approved for a loan. It is always better to get a pre-approval even before you start searching for investment properties, regardless of whether you are a beginner or an experienced investor. You will not only appear as a more credible buyer to property sellers, but you will also be ready to make an offer and move forward with buying a property as soon as you find the right one, without risking losing it to another more prepared buyer.
Step 3: Learn the Lingo
Real estate investing is a business on its own, and as any other business it comes with its own language and terminology. Since you will be dealing with property sellers, real estate agents and brokers, contractors, and other investors, you have to sound professional in your communication with them in order to gain their interest, trust, and commitment.
There is a plethora of real estate sources you can use including books, magazines, newsletters, etc. Indeed, the internet is probably the best source of real estate knowledge today. Don’t underestimate the importance of blogs, podcasts, and other online sources on everything real estate. Make sure you know the meaning and are able to calculate such terms as capitalization rate (or cap rate, for short), cash on cash return (CoC return), internal rate of return, rental yield, and many, many others.
Step 4: Research Potential Markets
While one of the benefits of real estate investing is that it doesn’t require formal education, you still need a lot of knowledge in order to succeed in the business. As soon as you begin to think about buying a rental property, start doing research on the most profitable markets for rental properties at the moment. Read recent reports by trustworthy sources such as NAR to learn all about the trends in and the state of different markets at the moment.
Focus on housing markets which are within your budget. For example, if you are looking for a property which costs up to $500,000, there is no point in considering San Francisco, let’s say.
Also, concentrate your research on markets which are good for your preferred rental strategy. For instance, if you want to invest in a traditional, long-term rental property, don’t waste your time on Joshua Tree, CA, which is an excellent location for investing in a short-term vacation rental but offers low return on investment for traditional rentals.
Related: Real Estate Investing: Traditional vs. Airbnb Investments
Narrow down your choice to a few markets (3-4) before you start looking for specific properties for sale.
Step 5: Conduct Real Estate Market Analysis
Location location location… If you have ever dealt with the real estate industry, you must have heard a hundred times that “location, location, location” are the three most important factors for the success of your real estate investing business. While other factors such as your property, your rental strategy, your personal skills, and your commitment are major determinants of how much money you will be able to make from real estate, there is no way to overestimate the importance of the location of your rental property either.
So, once you have decided on a few potential markets, you have to start digging deeper into them. Learn how to do real estate market analysis – or use an investment property calculator – to see what real estate comparables (or real estate comps, for short) look like in your housing markets of choice. See what kind of properties you can afford. Choose 3-4 comps – properties similar to the one you plan to buy in terms of number of bedrooms and bathrooms, size, age, amenities, and location – so that you know the right price range for your future rental property. Also check what rental rates you can receive in this city and neighborhood for the property which you can afford.
Related: How To Perform A Real Estate Market Analysis
Step 6: Look for Properties for Sale
Now you are ready to start your property search, one of the most exciting steps in the process of buying an investment property. Use a myriad of sources with property listings such as newspapers and websites. Don’t forget to ask around your own networks though. You never know, maybe your colleague or your doctor or even your hairdresser is looking for a buyer for his/her home or knows someone who is. Never ever underestimate the power and importance of networking in the real estate business.
During your property search, stick to your budget and to the expectations which you have set up for your rental property.
Note: Mashvisor might be your best bet to find a profitable rental property in an efficient manner. Turn 3 months of research into a 15-minute online search on our platform to land lucrative traditional and Airbnb investment properties.
Step 7: Consider Hiring a Real Estate Agent
Many property buyers think that using a real estate broker is a waste of money. Whereas their fees can be quite big, usually this is money well spent because of the time and efforts which your agent will be able to save you. Moreover, your agent will most of the time be able to negotiate a much better deal than you can because he/she is a professional. So, consider carefully whether you might actually make use of the services of a real estate broker.
To find the top performing real estate investment agents in your area, click here.
Step 8: Perform Investment Property Analysis
Once you have chosen a few properties – whether with the help of an agent or on your own – you have to conduct investment property analysis on each of this property to evaluate how good of an investment it is.
Related: How To Do Investment Property Analysis
Consider the price and estimate the other costs including one-time, startup costs such as appraisal, closing fees, agent fees, mortgage fees, repairs, etc. as well as recurring expenses like mortgage payments, property tax, insurance, property management, and others. Compare this amount to the rent you expect to be able to charge for the property. Check whether these add up to a good cap rate (above 8%) and cash on cash return. Remember to always aim for positive cash flow properties in your real estate business as your goal as an investor is to make money, not lose money.
For the most accurate results in the most efficient manner, employ the use of real estate analysis tools such as an investment property calculator, also known as a rental property calculator.
Once you have completed the eight steps outlined above, you will be able to move forward with buying your first rental property. While investing in real estate in general and rental properties in particular might sound intimidating, it is a viable and highly profitable business strategy if you take it seriously, educate yourself, do diligent research, and build the right real estate network.
