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SHOW NOTES FOR EPISODE 532: 10 TIPS FOR BUYING RENTAL PROPERTIES WITHOUT BREAKING YOUR BUDGET
Being a real estate investor in a sellers’ market it can be discouraging. However, did you know there are good deals out there if you just know where to look? In today’s podcast, Bill shares 10 ways investors can still find good deals in a sellers’ market.
Tip of the Week: Calculate Your Margins
Wall Street firms that buy distressed properties aim for returns of 5% to 7% because, among other expenses, they need to pay staff. Individuals investing in real estate should set a goal of a 8-10% return. Estimate maintenance costs at 1% of the property value annually. Other costs include homeowners’ insurance, possible homeowners’ association fees, property taxes, monthly expenses such as pest control, and landscaping, along with regular maintenance expenses for repairs.
10 Tips for Buying Rental Properties Without Breaking Your Budget
If you want to buy your first rental property, but aren’t sure if your budget can handle soaring real estate prices, we’ve got good news. There are things you can do to stretch your buying power. With the help of a good agents and brokers – and these 10 tips – you can become a savvy real estate investor without breaking your budget.
1. Get pre-approved for your home loan.
This means, fill out a loan application and go through the process of securing financing. That way, when you’re ready to seriously evaluate real estate, you’ll know exactly how much home you can afford. And you can prove to a seller that your offer is sincere.
2. Explore creative financing options.
During the home loan pre-approval process, ask about ways to get creative with your financing. Low or no down payment options, first and second mortgage combinations and first-time buyer programs might help you afford more funding. Some lenders may even off interest-only home mortgages; this may be a good “short-term” solution but make sure you thoroughly evaluate the terms for this type of home loan before proceeding. Down payment grants are also available in some instances and might be worth investigating. Here is a link to a podcast where we talk about places to get down payment grants: Grants For Real Estate Investing and here are more on buying properties with little or no money down:
- 430: 7 Ways to Buy Rental Properties with Little or No Money Down
- 084: 10 Best Ways to Buy a Property with Little or No Money Down
- 021: Buying Properties with Little or No Money Down with Brandon Turner
- 334: How to Acquire Investment Properties With No or Little Money Down
- 500: 16 No Money Down Strategies You Might Not Know
3. Make sure your finances are in order first.
Know where your purchase funds are coming from in advance. Do you need to borrow for your down payment from a friend, bank, credit card? Are you setting up a HELOC to set up a line of credit against the equity in your home? Are you tempted to use “reserve” funds that are designated for emergencies? You should not touch these funds. If you have funds within an IRA or 401K plan but it has not been converted to a self-directed account, make sure that process has been completed and the funds are readily accessible. Make sure you are ready to move fast if you find the right deal. Here are some of our podcasts on using self-directed accounts:
4. Look for vacant real estate.
Perhaps a seller’s job has transferred him out of the area. Or maybe a family purchased a new home before putting their existing one on the market. In any case, a vacant home could be just the deal for a savvy home buyer, so have your realtor or other team members look for vacant property in your preferred neighborhoods. And keep in mind, the longer a house stays empty, the greater your negotiating power will be.
5. Consider cosmetic fixers.
If you’re handy with a paintbrush, a toolset, and gardening equipment, consider buying real estate in need of cosmetic fixing. Property that lacks curb appeal needs minor handiwork or the yard overhauled could end up being the home of your dreams for a price you can afford. You just need to look beyond the ho-hum to see the potential of a cosmetic fixer. Here a podcast that might help: 396: Rental Property Fixes to Boost Rent
6. Buy a home that’s a major remodel project.
If you want to live, for example, in Southern California, but can’t afford a $2M home mortgage, consider buying a dilapidated cottage on a fabulous lot with western exposure. In time you’ll need to gut the existing home and build from the ground up or contract significant home improvements. But in the end, your property value will skyrocket. And if your carpentry and other construction skills are well-developed, you can save even more and accrue “sweat equity” during your remodel by doing much of the work yourself.
7. Don’t discount bank foreclosures.
One person’s loss could be your gain. Although the search for a decent foreclosure may take a while, your realtor should be able to help. The U.S. Department of Housing and Urban Development (http://www.hud.gov/) can be an excellent resource for foreclosed properties. Because HUD houses are sold at market value, your best bet will be homes that need cosmetic work or even major repair. Here are some podcasts on finding foreclosures:
8. Land with a manufactured home.
Sometimes, to buy a home on a budget, you need to look beyond convention. Even if your wish is to buy traditional real estate, you may have to settle for a piece of property in an outlying area with a mobile or manufactured home. Discuss this option with your real estate agent and try to keep an open mind about this possibility.
9. An older, smaller home.
Older homes in more rural markets are typically priced much less than newer construction and don’t tend to create buyer bidding wars. If you can enjoy life in an older and smaller home in a neighborhood or suburb off the beaten path, this could be your ticket to real estate ownership.
10. The cheapest house in the best neighborhood.
You have your heart set on a specific – and expensive – neighborhood. Maybe it’s the schools that you’re interested in. Or perhaps it’s the close proximity to downtown or the waterfront. In any case, a budget-savvy buyer will look for the least expensive home for sale in the neighborhood. If you’re not in a hurry, you can even play the waiting game to see what properties come on the market. Your real estate agent can be a real asset in this case by investigating potential sellers.
Buying real estate without breaking your budget will require research and compromise. On closing day, however, you’ll have the satisfaction of knowing that your homework paid off!
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2 comments. Leave new
It was really helpful when you said to look into getting pre-approved for a loan. My fiance and I are wanting to look into finding a rental home to move into before we get married in a couple of months, and we want to make sure that we do everything right. We’ll have to look into getting a rental loan for the home that we want to move into.
Thanks for your comments, Kate! And thanks for listening to our podcast!