Buying your first rental property can be intimidating and stressful as there are so many things to take into consideration. If you are planning on purchasing your first rental property and doing so before 2020, read our step-by-step guide to know exactly how to buy rental property in a short time period.
Buying an investment property before the end of the year comes with many perks, such as less competition from other buyers, availability of more affordable contractors, and saving on taxes, just to name a few. The 2019 housing market forecast by the National Association of Realtors predicts that the US housing market 2020 will show higher median house prices. So, to seize property with current market prices, buy your rental investment property before the end of the year!
But just how are you supposed to handle all the steps required for buying a property in such a short time? This blog will break it all down for you. In the following, we will show you the steps to buying a rental property before 2020.
How to Buy Rental Property in 6 Steps
#1 – Getting Rental Property Financing in Order
Down payment and credit score
Unless you are one of the few lucky ones who have the means to pay for investment properties in cash, you need to prepare and save up some money beforehand. Here we come to the planning and preparation aspect of how to buy rental property. Mortgage lenders want to see a 15 to 20% down payment when you invest in real estate. If you are buying a property worth $100k, prepare to put down $15k- $20k.
Related: What You Need to Know About the Minimum Down Payment for Investment Property
In addition to saving money for financing rental property, you need to be aware of your credit score. In principle, it should be about 720 or higher. If your credit score is not there yet, you will need to plan how to get there before proceeding to buy a property.
Tax returns
When a lender evaluates whether to give you a loan, they will look through your past tax returns to verify your income and proof of income and employment. They might also want to have a look at your bank statements. To make this process as smooth as possible, have them all ready for the meeting with the lender.
Getting in touch with a lender
Speaking of meeting mortgage lenders, you should start looking for them while you’re still searching for investment properties. Why? It is important to check with lenders whether a property you are interested in is in your price range or not. Otherwise, you might end up wasting yours or the lenders’ time on properties you cannot afford.
When you have identified an ideal investment property to buy, book an appointment with your lender and prepare all the paperwork to take with you. Remember, you want to do this right and without delays, as there might be dozens of other people ready to buy the same property immediately –so prepare well to avoid delays!
#2 – Searching for Investment Properties
The second major step in our instructions for how to buy investment property is searching for properties. When looking for rental properties for sale, you need to know what to look for first. Obviously, you need to evaluate what kind of property is the right fit for you – is it a single-family home, half-duplex, condominium or would some other type suit your needs better? After defining your requirements, it’s time for the fun part of this process –hunting for properties!
Here’s a basic checklist for your property search:
- Conduct a thorough rental market analysis of the investment locations you are interested in. The area is likely to determine your target customers and the rental rates they are willing to pay. What would your intended tenants look for when renting an apartment? Critically evaluate whether the property and the investment location can fulfill your tenants’ requirements.
- Familiarize yourself with property taxation in the area of your choice and investigate predictions on how they will develop in the future.
- Check the municipality’s plans for the area. If you notice multiple construction projects planned for the area, it has good growth potential. However, be aware of plans that might harm your real estate business –such as the construction of competing rental properties.
- Search for properties within your price range in the area you are interested in. Mashvisor’s Property Finder is an excellent tool for doing this faster than ever before. Just set the filters to match your requirements and Mashvisor will provide you a list of properties in locations of your choice. (Your budget is not the only filter! Sign up for free and check it out for yourself.)
- Conduct a rental property analysis and understand rental rates in the area of your choice –keeping in mind the profile of your intended tenants. Make sure those rates will allow you to cover the expenses of the property (more on estimating your future cash flow coming up in a moment).
- Know your competition and the average occupancy rates in your location of choice. If there are multiple vacant apartments, you might need to set lower rental rates.
#3 – Calculating Your Cash Flow
Calculating cash flow is perhaps the most important analysis when buying a rental property. This ratio will determine if your real estate investment will make any financial sense. To put it simply, cash flow analysis will calculate the difference of your revenues and monthly costs associated with the rental property –the result will be your monthly cash flow. Of course, you want to shoot for positive cash flow, meaning that you will have some profit left each month after deducting all the costs. There are multiple online resources and calculators for you to determine the expected cash flow of any property you are planning on buying. For example, Mashvisor’s rental property and Airbnb calculator can handle all of this for you (and more!).
Related: Rental Property Cash Flow: What’s Considered Good?
#4 – Placing Offers on Properties
After finding the right investment property, it is time to place some offers! Here the best policy is to follow your unique financing plan and requirements. While some real estate investors might be able to offer the asking price immediately, your offer should be based on your situation. It is completely okay to place an offer that is less than the asking price –if that is what you can or are willing to pay for the house. This stage is usually both exciting and nerve-wracking as you cannot know the outcome upfront. Be patient and hope it turns in your favor. If not, keep looking and bidding!
Related: How Much to Offer on a House: An Investor’s Guide
#5 – Inspecting the Investment Property
After a seller accepts your offer, its time to see the real estate property. Once there, try to check everything you possibly can. Best would be to check the property even before placing the offer, but better late than never. No matter what the sellers say, all properties need an inspection –even the new ones. After seeing the investment property, define renovation needs and calculate costs. This will add to the costs of the investment, so do also try to negotiate a price reduction if surprising issues come up. For some real estate investors, buying a house in a poor condition can also be a strategy to boost ROI. However, buying a fixer-upper is recommended for more experienced investors who know renovation work is often trickier –and more costly –than meets the eye.
#6 – Paying Closing Costs
Finally, all there is left to do is to close the real estate deal. This might come as a surprise to new investors, but be prepared to pay closing costs on the rental property. For example, for a property of $400k, your closing costs might be up to 1% of its price. This might end up being a significant sum, so do plan for this early on.
Related: What Real Estate Closing Costs Should I Expect Upon Closing a Deal?
Conclusion
To summarize our step-by-step instructions on how to buy rental property before 2020, buying rental property successfully boils down to your real estate financing plan, your capability to search for properties and calculate their cash flow prospects, placing offers, and finally inspecting and paying the closing costs. Preparing for each step carefully makes the process faster and ensures you will be able to close a great deal before 2020. So, what are you still waiting for?