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SHOW NOTES FOR EPISODE 130: 9 STEPS TO BUYING YOUR FIRST RENTAL PROPERTY
Buying a rental property is largely similar to buying a residential property. However, some important differences do exist. In this episode, Bill explains the main steps you need to follow once you have made the decision to buy an investment property.
First, a Quick Update on my AirBNB Conversion in Indy
- Spent 5 days in Indiana (Aug 15-20)
- Primary reason: to set-up one unit of my 22 unit apartment as a test AirBNB rental unit. ThesStudio/efficiency unit normally rents for $450 per month. AirBNB monthly rate: $900
- Because studios and efficiency units are so transient in nature, by converting some studios to AirBNB rentals, I hope to offset the cash flow loss due to frequent vacancies.
- Spent close to $2,000 on labor, rehab, furniture, TV, Internet, Roku, Appliances, etc. as part of the conversion (not counting travel expenses)
- Returned home and received first converted unit online 30-day booking 2 days after I returned home!
Here are some pictures:
9 Steps to Buying Your First Rental Property
Buying a rental property is largely similar to buying a residential property. However, some important differences do exist. Although there is no complete guide on how to buy a rental property, below are the main steps which you need to follow once you have made the decision to buy an investment property.
1. Know Your Why
In episode #122, I talk about the Importance of Knowing Your Why. Before you make your first rental purchase, you need to know why you’re making the purchase in the first place. What is your “end game” and your primary motivation.
This will help you in strategizing and outlining your plan.
2. Find a Mentor
Although you can buy your first property without one, it’s always better to have that “other voice,” experienced person or second opinion to be able to objectively review your numbers and details regarding the purchase. Also, it helps if this person understands your “why” and your overall goals and objectives to see if this property makes sense for the long-run.
This step help you reduce your chances of error or making the types of mistakes you may regret later. DO NOT BE AFRAID TO MAKE MISTAKES! You will make them. But this step will just help prevent the “big ones.”
If you don’t have and “official mentor” yet but it has to be someone you respect and is very experience in the type of real estate investing you are doing. Check out episode #069, entitled The Importance of Finding a Mentor, with Paul Moore and episode #080, entitled Should You Pay for a Mentor.
3. Do Your Homework.
Buying a rental property can be as exciting as buying your own home, but that doesn’t mean that you should rush before you have done proper research. Though you don’t need to be an expert in real estate investments or even in real estate, you have to do your homework properly. Start answering some simple questions to determine the best investment property for you:
- What kind of investment property do you want to buy? If it’s your first time buying a rental property, I would generally recommend you to start small and simple. Look for an apartment, a duplex, or a small apartment building. Buying a large income property sounds tempting because of the expected higher profits, but it is also more costly and will require more work. Remember to not overwhelm yourself by starting bigger than you can manage or afford. Real estate investing is to a large extent learning-by-doing. After you have learnt the basics of it and have started making profit, you can think about expanding your rental property business by either replacing your first rental property with a bigger one or buying a second investment property.
- Which cities and which neighborhoods do you want to buy your first investment property in? Identify the best places to buy rental property. Choose carefully the area in which you would like to buy an income property. Is it attractive for tenants? Is there demand? How is the infrastructure around? Is it getting overcrowded? What are average prices? Are prices on the rise? Check out episode #095 on How to Find Emerging Markets for the Best Deals with our guest Vinney Chopra.
- Once you have settled on a neighborhood, what is the average rent in this area? The rent that you expect to charge for your income property will be the main determinant of your profit, so you have to know the average rent for this kind of property.
4. Go to the Bank
Since the very beginning, you have to think about financing the rental property which you will be buying. Paying for a rental property is equally as important as finding the right property. Thus, start arranging the financing as soon as you start looking for a potential income property. Talk with your bank about how much you can afford to buy for. This will depend on your startup capital, if any, and the expected rent for the investment property that you will end of buying. See episode #067 with Michael Becker and Paul Peebles on How to Get Bankers to Love You.
5. Do the Math
Once you have an idea about the kind of income property you want to invest in and the mortgage you can afford, do some calculations. Don’t throw yourself in real estate investing without doing the proper math first. It seems simple: cash flow equals income minus expenses. Income is the rent that you will charge your tenants for your investment property. Check out my three-part series on Analysing Rental Properties, beginning with episode #036, and continuing with episodes #40 and #42
Expenses, however, are more complicated. The most obvious one is the mortgage. Online investment property mortgage calculators can be helpful here. Then, you come to taxes. Remember that property taxes might grow exponentially. Many states offer homeowners exemptions on their primary residence, so property taxes on rental properties are significantly higher. Then, you need to include other less apparent costs such as maintenance. Just like your home, your income property will require maintenance. As soon as you become a landlord, you or your property manager will start receiving phone calls from your tenants about problems with your property all the time. And you will need to fix them – for a price. The costs will vary significantly so have a plan and know the costs beforehand. Also, don’t underestimate the damage that renters can and will do.
6. Make a Plan
After you have done some research and thinking, set specific goals and make a plan. It is best to write down your goals and periodically check that you are sticking to them. If you decide to buy a simple family home for $500,000, don’t get tempted by a $600,000 house with a beautiful garden. Remember that investing in rental property is a business and should be treated as such. Be sure to make the decisions that will provide you with the most profitable income property at a price that you can afford. See episode #058 on Year-End Planning and #060 on Your 2017 Strategic Plan.
7. Network
Probably real estate is all about relationships, the best way for a beginner real estate investor to learn is to connect with local investors. Reach out to other already established investors in the areas which you are considering. Successful investors are proud of their achievements and like to brag about them. Learn from their experiences. However, this doesn’t mean overwhelming them with questions and requests. Try to learn a few things from each investor you talk to.
8. Start Shopping
Now comes the exciting part – the shopping for the actual investment property. There are many website which you can use to find listings. There are many in various US cities and neighborhoods. However, these sites don’t usually contain all the information you will need before making your decision. Thus, it makes sense to have at least 3 brokers/agents in each area you are searching. Brokers are usually paid by the seller, so you don’t have to worry about the cost. It’s important to find a broker who understands the area well and is in tune you’re your needs and criteria. Ultimately, you hope to develop such a strong rapport that you will start receiving “off-market” or “pocket listings” from your broker. See episode #093 with Michael Becker on Working with Brokers and Finding the Best Off-Market Deals.
9. Make an Offer
When you have found the investment property you want to go for and have clarified all necessary details, it is now time to make your offer. Your real estate broker – if you are using one – will fill out the paperwork and submit your offer to the seller. Make sure to only spend an amount that works for you and meets your criteria. Don’t let your emotions take over. Once again, remember that this is a business decision, so the numbers have to make sense.
Once you have completed these steps, you are – more or less – ready to enter the world of rental property business.
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