“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.” – Andrew Carnegie, Scottish businessman.
Buying rental property is among the fastest and the most secure ways of building serious wealth. Most people know that it is possible to make a lot of money by investing in real estate but they do not know how to go about it. Investing in real estate can be a challenging task. However, spending some time building a strong knowledge base, before you begin, will give you a great head start.
The steps to purchasing rental property are not completely different from those of purchasing your home. The processes have their similarities and a few important differences. If you harbor plans of becoming a landlord, this blog will give you a step by step guide to purchasing your first rental property.
Step 1: Before purchasing rentals, do your homework
This is a very important step and it should never be overlooked. Most people tend to start shopping for rental properties immediately they decide to buy rentals and this ends up becoming their main undoing. The process of purchasing a rental property begins long before you even think of stepping foot into any property.
As you do your homework, some of the things you need to research ahead of time include:
- What type of rental property you want to purchase
- How much money you can afford to pay
- What is the return on investment you expect to make
- What kind of neighborhood you plan to invest in
- What is the average rent in this neighborhood
Carrying out the groundwork can be a daunting job but if you know the questions to ask, it can go very well for you.
Step 2: Come up with a plan and set a criteria
Once you are done with your homework, start creating a plan and developing your criteria. Jot down your plans and objectives and keep referring at them frequently. If you want to buy a rental property costing something between $250,000 and $300,000, a house with a beautiful garden but costing $350,000 can easily distract you. However, if you stick to your initial plan and criteria, you can avoid these distractions and find yourself a property that you can be able to pay for without problems.
Step 3: Arrange Financing
Many people looking to invest in real estate usually make the mistake of searching for properties before they arrange for financing. Imagine shopping and settling on a rental property that you think is perfect for you, only to be told that you cannot afford it because of your financial situation. This is not only discouraging, but also very embarrassing. Therefore, before you start searching for rental properties to buy, talk to a mortgage officer or your bank so that you can know how much house you can afford to purchase. There are various ways of getting real estate financing, so talk to different lenders and evaluate all the financing options before you settle on one.
Step 4: Start searching for the rental property
This is the most exciting part and it is what most real estate investors look forward to. An easy place to begin is to check online at your local MLS listings to see what properties are available at your area. The most common websites to check for the listings include:
These sites typically search the same MLS listings that real estate agents search, so you can find a lot of properties here. However, the above sites do not have all the information you would need to know about a specific property and that is why you need to contact a trustworthy local real estate agent to give you more information. There are no additional costs incurred when you use a real estate agent because the agent is paid a commission by the seller – and he is only paid the commission when you purchase the property.
When looking for a real estate agent, try to find an agent who has specialized in working with investors. This type of agent will be more aware of your needs and he will also have knowledge of what makes a great rental property. Remember to share, with your agent, your criteria for rentals so that he can help you find a property that meets your requirements.
Step 5: Make an offer
After you have found a rental property that is good for your needs and you have walked through it, make an offer. You only need to instruct your real estate agent what to do and he will complete the necessary paperwork and submit it to the seller. Once the seller has received your offer, negotiations will kick off.
In negotiations, be ready to only spend an amount that is sensible to you. Figure out the amount of cash- flow you want to make and never allow emotions to supersede numbers. Remember, you will always have the advantage in negotiation if you are prepared to walk away. If you and the seller cannot agree on a figure that works for you, then the rental property is not worth purchasing.
While negotiating, keep in mind that the price of the rentals should not be the only consideration. There is a variety of other clauses you can include in your offer – depending on the strength of the deal and the popularity of the property. These clauses include:
- The closing date
- Seller financial concessions
- Financing contingency
- Inspection contingency, among others.
These clauses are very vital and it is imperative to discuss their inclusion in your offer. Consult with your real estate agent so that all the necessary clauses can be included in your offer. After you and the seller agree upon all terms and signed the agreement, you will now have what is referred to as “Mutual Acceptance”.
Step 6: Do due diligence
Now that you have agreed on the price of the rental property and you have set a closing date, you should perform due diligence on the property. To start with, you should hire a professional home inspector to carry out a complete inspection of the property. During this inspection, the inspector will be looking for any flaws on the property that may cost you a fortune in future. If the inspection identifies a major defect, you can go back to the seller and ask for a renegotiation or walk out of the deal entirely – as long you included the inspection contingency in your offer.
Try not to be very tough on the seller if you are buying in a hot market. Otherwise, he will walk away from the deal and give it to somebody else. Conversely, don’t commit yourself to a rental property that has major faults. Carefully, consider all the available options and keep your objectives in mind always.
Step 7: Close the sale
After you are satisfied with the inspection report, proceed to your lender and finalize your mortgage. Your attorney or the title company will also prepare the necessary documents for this transfer to go through. After the check has been sent to the seller and all the necessary documents signed, you are now a proud owner a rental property!
Step 8: Start Landlording
Finally, you are now the newest landlord in town! Start screening potential tenants and within no time, you will start earning income from your new rentals.