A great way to increase your income and build wealth is through rental properties. Many people talk about buying a rental property but never do, many times because they don’t know how or they don’t know where to start. Others have purchased a rental property and although they had good intentions end up losing money — generally because they paid too much for it, purchased it in a bad location, or maintaining the property was more costly than the income it produced.
To learn how to purchase a rental property, where to start, and avoid purchasing a bad investment — I have constructed a step-by-step guide for purchasing a rental property.
Step One: Research, Research, Research
This is the most important step and also the most overlooked step. Before you rush into a purchase, be sure you do your homework!
- What you can afford and how much you plan to spend
- Type of rental property — house, duplex, apartment building, etc.
- The location of the rental property
- Average rent charged for that area, and the amount you’ll charge
- Return on Investment (ROI)
It’s very important to do your research. Figure out what properties are currently being sold for that are similar to the type you want to purchase and what they’ve sold for in the past in that area, going back 5-to-10 years.
You should also ask yourself:
- What’s the average rent charged in that area?
- Is it located in an area with a lot development?
- Is it located in a good school district?
- What type of neighborhood is it in?
By answering these questions you’ll have a better understanding of whether you’ll be making a good investment or not.
Step Two: Understand Your Goals and Establish a Plan
Once you’ve completed your homework, you can begin establishing a plan that aligns with your goals. Your plan should indicate what your criteria is for the investment. Clearly state the type of property you want and what the property should include — such as its features, type interior design it should have, its fixtures, number of rooms, etc. Know and understand exactly what you criteria is for your investment property and indicate it in you plan, by doing this you’ll be sure your investment aligns with your goals.
While developing your plan:
- Keep the End in mind — what’s your exit strategy?
- Will you manage the property yourself? Or Hire a property manager?
- Does your criteria fit within your budget?
Step Three: Financing Your Investment Property
Many times, this step is where individuals and couples run into trouble — they do the research and find the perfect rental property only to become heart-broken when they find out they can’t afford it, usually because they didn’t secure the proper financing before shopping.
Before you begin shopping around for a rental property, it’s important to know what you can afford and the amount of financing you qualify for. There are many ways to raise capital to finance a rental property, the two most common ways for financing this type of investment is by you (out-of-pocket), or financing from a bank or other lender.
If you don’t have the necessary funds to finance the rental property on your own, be sure to sit down and talk with your bank or lender to find out what you can afford and how much they’ll lend you.
Step Four: Finding a Rental Property
You’ve done your research, created a plan, and know the amount you can spend — now comes the fun part, finding a rental property to purchase.
In the past people had limited options, such as contacting a real estate agent or browsing through the classified section of your local newspaper. Although these methods are still used today and are still good options to help refine your search, they should be used in addition to other methods. By taking on a real estate agent it’s possible you may have to pay a real estate agent fee, but generally only the seller pays this fee. Also, with the newspaper you’re generally limited to only what’s listed for that local area.
Thanks to the internet, you have many more options to help you research properties and refine your search. By using the internet you can browse property listings, compare prices, set your criteria, and search for properties in other areas than just your local area if you’d like. A few popular websites to search property listings include:
These are all good websites and they’re a good place to begin your search, but many times there’ll be other properties that are not listed on these, making it a good idea to also consult with a real estate agent. There are some real estate agents who specialize in working with investors. When using a real estate agent be sure they’re aware of exactly what you want, this ensures better results and you won’t be wasting your time or theirs.
Step Five: Making and Negotiating an Offer
Once you’ve found a property that meets all your criteria and budget, it’s time to make an offer. To make this process easier, you can have your real estate agent do it on your behalf. Your real estate agent will fill all the paper work and give the requested offer to the seller’s agent, who will then take the offer to the seller themselves. From there, the seller will either accept the offer or reject it. If they don’t accept the offer the first time around, you can then begin negotiating.
Making an offer can be very exciting — especially if the property meets all of your criteria, emotions can start to run high. This is fine, it’s supposed to be a little fun and exciting, just don’t let your emotions show up in your offer. Be sure you stick to the budget you’ve set, it can be easy to make an offer that’s too high and above your budget simply because our emotions can get the best of us. It’s also not a good idea to offer the full extent of your budget in the initial offer. It’s okay to make a lower offer to start and you’ll have more wiggle room in your budget for negotiations if need be.
Don’t let your emotions get the best of you and be prepared to walk away from a deal when necessary. The property you’re buying is an investment — if you pay too much for your investment, it could instead turn into an expense.
Step Six: Inspections and Finalizing Agreements
Once you and the seller have settled on a price, you’ll want to hire an inspector to inspect the property for any defects that could cost you a substantial amount of money to fix. If any defects are found you can always go back and renegotiate. If you can’t come to a renegotiation and/or the defects will be too costly to fix or repair, it’ll be up to you to make the decision of whether or not it’s still a sound investment.
This is also the time to finalize any agreements with the bank or any other lenders. Depending on the area you’ve purchased the property, either an Attorney or the Title Company will take over with leading the transaction. Then, you’ll sign the appropriate documents on closing day and be the owner of a new rental property!
Step Seven: Begin Renting Your Property
Congratulations! You’re a Landowner! This step is fairly straight forward and I don’t want to insult you by questioning your intelligence. It’s time for your investment to pay dividends. If you don’t already have a tenant, get out and find one! Lastly, below are some tools and management software to help ease the burden of managing your property and get the most out of your investment:
Property Management Software: Property management software can help you stay organized while you own your rental properties and manage financial reports. It will generate Income and Expenses Reports, Rent Roll Report, Tenant Payment History Report, Tenant Contact Report, Owner Contact Report, and Tax Reports. Property management software will also manage things like Tenant and Lease Information and Tenant Billing.
Tenant Screening: It’s always important to screen all potential Tenants before renting out to them. Screening potential tenants allows you to find out two very important things. 1. Credit History — which gives you a good indicator as to whether or not they will pay rent on time or at all. 2. Criminal Background Check — this will inform you of an applicant’s criminal history if they have one.
Screening potential clients helps protect you and your rental property. The service listed below will screen all potential tenants for you and make the application process much smoother. It’ll allow any Landlord, Leasing agent, or Property Manager access to criminal background and credit data on prospective tenants.
Legal Advice: Get expert legal advice and reassurance by making sure everything is legal for your Rental Property to avoid any mishaps or lawsuits. Also, be certain all your Landlord-Tenant documents and agreements are valid and legal, and have all documents reviewed.
Carbon Monoxide Inspector and Detectors: You can manage your rentals air quality directly from you smartphone to help protect tenants living in your rental property.
Author: Tyler DeBroux
Tyler started Oddball Wealth towards the end of 2014 after graduating college, as a way to stay relevant in his area of study, stimulate his mind, and to educate and help others.
Tyler has worked in the financial services industry, as a financial advisor, helping his clients make wise financial decisions and personalized long-term financial plans. Since graduating college in December of 2014, Tyler has paid off more than $15,000 in student loan debt and counting, his goal is to have all his student loans paid in full by the in of 2016.
Tyler is an entrepreneur and an expert in personal finance. Two of his many hobbies include investing and building online businesses. He is also a big advocate of early retirement and an aggressive saver, who utilizes any financial resources and tools available to him to help reach his goals for achieving financial independents.