Owning an income property provides benefits such as building wealth and tax deductibles. Everyone wants to take advantage of this but they ask, what the steps to buying a rental property? Actually, buying a rental property for investing is similar to buying a home to live in. However, the most important differences are being able to determine if the property will give you a positive cash flow, be manageable based your schedule, and if it will be appealing to tenants (not to you.) Take a look at how to figure this all out.
1. Do Your Research
It is important to identify your objectives and what is required to execute them. Before doing anything, ask yourself some questions.
What kind of investment property do you want? Do you want to invest in a single-family home or in an apartment unit? What strategy will you use? Do you want to be an active or passive investor when owning a rental property? How much can you afford for a down payment? Where do you want to invest? What kind of income can you expect?
If you know the answers to these questions, then the research and decision-making process will be easier for you. But if you don’t know your options, you can do additional research, using sources like The Expert Guide to Real Estate Investments.
2. Do Your Math and Secure Financing
After thorough research, you should be able to outline your budget and criteria. Calculate your investment and monthly costs and then figure out what you can afford. Check out the financial process of buying a house as an investor to learn about loans and additional costs. Make sure that you have talked to a banker and been advised BEFORE looking for a property. Most importantly, can the property give you a positive cash flow? Meaning, the estimated monthly income exceed the estimated monthly expenses. You can confirm these numbers later once picking a property but have some prior knowledge by looking at typical costs and income in the area.
3. Look for a Property
There are many websites you can use to find real estate listings. Mashvisor is a great tool to find properties and their data such as cash flow, occupancy rates, and more. You can also use the interactive investment property calculator which allows you to edit cost assumptions to get an analysis that better suits you. Essentially, this site helps take care of steps two and three. Once you have selected an area, you can get an agent, usually for free, to get further consulting and to know the details of the neighborhood. Finding an investor friendly real estate agent can be a huge asset. Finally, investing in the right neighborhood is very important.
4. Make an Offer
Once you have found a property which you believe will generate a positive cash flow and is in a desirable location, then make an offer. Your real estate agent will work on the paperwork or you can use DotLoop to take care of the transactions. Once the negotiating begins, stick to your numbers and remember your objective is to have a positive cash flow. If the negotiations do not produce the deal that you know you need to make money, walk away. There are other properties out there.
There are other things to take into consideration when making an offer. Get advised on whether to include closing date, inspection contingency, and other costs.
5. Inspect and Close
Now that a closing date is set, it’s time for an inspection which will reveal any minor issues or deal-breakers. If you do find costly issues, you can re-negotiate with the bank depending on your inspection contingency timeline. You can also ask the seller to make the repairs. If the repairs still fall in your investment criteria, then move forward. Spending money during inspection process is better than discovering something later on. Keep in mind; you shouldn’t push too much when negotiating if you’re buying in a hot market because that could lose you the property. Between the inspection and closing, you will be going through the transition process, which is handled by the Title Company or lawyer.
Congratulations, you’re a landlord!
What was the best resource for you when looking for a rental property? Were you able to create positive cash flow from your first investment? What was the toughest part in this process?