How to buy Investment Properties
10 Basic Steps for Beginners
Getting into the real estate game and buying your first investment property is exciting, and a little scary, but it is the first crucial step in taking control of your financial future. It will create the first stream of passive income, which will cover part of your living expenses so that you don’t have to actively work for that money anymore. As you continue investing in real estate and building your portfolio, the amount of passive income increases until all your living expenses are covered and you are “Financially free”. That is the point at which you no longer have to actively “work” for income to cover your living expenses, support your family, put your kids through college or secure your retirement.
Investing in Real Estate puts your financial future in your hands and under your control.
These are the 10 Basic Steps for buying Your First Rental Property:
Step 1: Determine Your Investable Cash
Identify the amount of investable cash you can allocate to purchase your first rental property. You need to start developing your buying criteria, and that includes identifying the price-range of the property you want to buy.
Step 2: Decide Whether to Finance or Pay Cash
This is an important decision to make early on so you know what you can buy with your investable cash. If you qualify for financing, you may be able to purchase 2,3 or even 4 properties instead of just one for cash. If you choose to finance, be sure to work with a lender who specializes in serving real estate investors (ask them if this is the majority of their business). Then, pre-qualify with the lender so that you understand exactly what rates and terms are available to you.
Step 3: Identify the Best Market for You
Removing geographic restrictions and understanding how to identify the best real estate markets regardless of where you live is a crucial step. It is important to select an “investor-advantaged” market with positive economic indicators like job growth and population growth as well as favorable price to rent ratios so you optimize your cash flow margin. But be sure to buy in a micro-market with strong rental demand to minimize vacancy. Also, look for communities with strong demand by primary homeowners who want to live there so you can have the best chance of selling for retail price to an owner-occupant down the road when you are ready to exit.
Step 4: Select and Reserve Your Property
The best way to mitigate your up-front risk when buying a “performing rental property” that is either new or fully renovated and already has a tenant and local property management in place. These are usually private, off market buying opportunities. When you select the performing property that is the best fit for you, submit an offer to the seller.
Step 5: Sign Contract and Send Earnest Money
Upon receiving and accepting your offer, the seller will issue a contract to you as well as wiring instruction on how to send your refundable “earnest” money deposit to escrow. PRO-TIP: Hire a Real Estate Attorney to help review the contract of purchase. “Earnest money” is a good faith deposit to show that you are serious so the seller is comfortable taking the property off the market while you do your due diligence and decide if you want to move forward with the transaction or not. Always read the contract carefully, make sure you understand everything, ask questions if you don’t and feel free to have your financial or legal advisors review it as well. Always ensure your send your earnest money deposit to a 3rd party escrow account, not to the seller. Your earnest money deposit should be 100% refundable to you in accordance with the terms of the contract, in the event that you choose to exercise one of the contingencies and not move forward with transaction.
Step 6: Conduct Your Due Diligence
Now that you have the property under contract, it is time for you to conduct your due diligence. Always remember that you are 100% responsible for doing you own due diligence.
A. Consult your tax, legal or financial advisors to ensure the property is a good fit for your personal investing criteria.
B. Review closed sales and renal comparables to ensure you are buying at or below fair market value and that you are getting fair market rent. If you are using financing, the lender will also require an appraisal.
C. Order a Professional Home Inspection. It is important that you (not the seller or anyone else) hire the Home Inspector so they work for you and have your interest at heart. The Home Inspector’s job includes finding anything that is not up to code or anything that could pose an immediate safety hazard, as well as identifying potential “deferred maintenance” issues that could arise down the road. There are other types of inspections you can choose to order as well (such as termite inspection)
D. Many people (especially experienced investors) buy sight unseen as long as they execute a solid 3rd party due diligence regiment. But plenty of people (especially first time investors) like to go visit the area, shake hands with the seller, walk the property, and get a feel for the market before they close. If a trip to see the property would make you more comfortable with the purchase, you should consider adding it to you due diligence checklist.
Step 7: Sign a Property Management Agreement and get Property Insurance
Since you want to be a real estate investor and not a landlord (even if the property is down the street from you), you will want to hire a professional property manager (and factor that expense into your monthly cash flow analysis). As with the purchase contract, you should read the property management agreement thoroughly, ensure you understand it all or ask about anything you don’t understand, and feel free to have your legal or other advisors review that agreement as well.
Step 8: Get all your paperwork together and Sign Closing Documents
Once you have completed all your due diligence and have decided to move forward, the Title Company or Closing Attorney will send you all the closing documents (including the lending documents if you are financing the purchase). You typically can sign these documents in front of a mobile notary or you will have to go to the Closing Attorneys’ office. You will wire the remaining money due on the property when you sign the closing documents, then the deal will close and fund and you will be the proud owner of your first investment property. Congratulations!
Step 9: Sit Back and Collect your Passive Income
Most property management companies will have an online portal so you can monitor your properties online 24/7. You can contact the property manager if you need something or have a questions, but otherwise you can just relax and have you monthly rent deposited directly into your account.
Step 10: Spread the Good News
Now you can tell everyone you know that you are a real estate investor! Then…..start thinking about your next purchase and how you can continue buying investment properties and building your portfolio of cash-flowing real estate until you are financially free.
Disclaimer: This is not tax or investment advice. It is your duty to consult your own CPA, Legal and Financial Advisors about your individual situation and applicable laws. No appreciation, positive cash flow, or return on investment can ever by guaranteed. All real estate investing entails risk which buyer assumes, it is your duty to do your own due diligence before buying any real estate.
Category: Harbour Group Capital News