It may be common knowledge that buying apartment or rental property can be one of the most secure as well as fastest ways to build significant wealth but the understanding of how to is not so common. The actual steps to buying a rental property, are not drastically different from buying your own home, with a few essential differences. This page is going to make it clear step by step how to buy a rental residence and begin your residual income in real estate investing.
Do Your Homework Prior to Buying Rental Property
Please and I mean please don’t skip this step. As soon as you’ve created your decision that you want to buy a rental, it can be easy to start shopping for homes and picking out the colors. However, your first step should always begin long before ever stepping foot into a house.
- Doing your homework beforehand means researching:
- What kind of property you want to make your investment?
- How much you are able to pay?
- What kind of community you want your investment?
- What the going rate for rent is in your desired area?
- How much of a (ROI) return on investment you hope to make?
- Doing your homework can be difficult for one major reason: Not everyone knows what questions to ask.
Make a Plan and Build Criteria
Once you’ve done the initial homework, you can begin creating a plan and setting your own criteria. I highly recommend you are writing down your plan including your goals, and refer to them often. If you are looking to buy a single family home for between $150,000 and $200,000, it’s easy to get distracted by a home with the beautiful garden for only $250,000. By stating your own plan and building your criteria, you’ll be able to hold yourself accountable for your own goals.
One of the most common mistakes made by homeowners is to start searching ahead of arranging their finances and lending. However, this error has caused untold distress when buyers find they will can’t afford the dream home they’ve found. The specific principle applies to buying any property. Before shopping for your brand new rental property, be sure to talk with a bank about how much you can afford to buy. There is a wide variety of different paths to real estate financing, therefore always be sure to weigh all your financing options before making any choices.
Begin Shopping For a Rental Property
Right now comes the exciting part! It’s important to get in touch with a local Realtor that you can trust to get you more details and assist in this process. An agent is generally only paid by the seller, when you purchase the home. So for a buyer, using a real estate agent is practically free.
It’s often helpful to find a real estate agent who specializes in working with investors, as they are more aware of what makes the best rental property. Also, be sure to share your criteria (See above in step two) for your rental property, and allow your Realtor to help you find the best properties which meet your qualifications.
Make Your Offer
When you locate a rental property you want to pursue, and have walked through every inch, the next move is to make the offer. To achieve this, your real estate agent will submit the paperwork based on your requests and submit your offer to the selling agent. The selling agent will take your offer directly to the seller, and negotiations will begin.
Make sure to only spend the amount that makes the most sense to you to purchase the rental. (Remember this is a business decision.) Decide how much cash flow you need and don’t let emotion bypass the numbers. Be willing to simply walk away and you’ll always maintain the upper hand in your negotiations. If you can’t agree or find a number that works for you then it’s not worth buying.
Remember: It’s better to not have a deal then get a bad one.
Also remember, price is not the only consideration. Depending on the direction of the market, the strength the deal and the popularity of the home, there are many other issues within your offer, including:
- Closing date
- Inspection Contingency
- Contingency of Financing
- Seller Concessions
- and many more
These items are all imperative during discussion and you need to decide what you will include in your offer. Be sure to engage and communicate with your real estate agent as they are there to help you with all the essential parts of the offer. Once you have signed an agreement with the seller and both of you have agreed upon all conditions, you now have what is known as “Mutual Acceptance.”
You’ve finally agreed on an expense and you have a closing time set. Now, it’s time to begin your (Research) due diligence. During this period (according to the days specified in your contractual agreement) you’ll hire a home inspector to execute a conditional inspection for the property, looking for any existing defects that may cost you money in the future. In the event that something serious is found, you can always return back to the bargaining table and re-negotiate with the bank (provided that it you have within your “inspection contingency” timeline, specified in your offer.)
Should you be buying in a “hot market” it may not be a good idea to nickel-and-dime the seller, or they may will not conform to your requests and stroll from the deal, giving it to another buyer. On the other hand, it’s important that you don’t find yourself stuck with a property that has significant problems (The Money Pit.) So be sure to weigh the decisions carefully keeping your goals in mind at all times.
Do your best to make an informed decision “mutual acceptance” and closing. Additionally, you will finalize the financial agreement with your bank or hard money lender. This is also the time when the title company will step into the deal and will take over facilitating the transaction. If the day of closing comes, you may sign documents and will be provided keys to your new rental property.
Start Land Lording!!
Finally, the sale has closed and you are now a landlord!!!