It’s a fact; there are a lot of things you need to do before you buy your first rental property. You may not know exactly what to look out for. It can be like walking through a minefield. You tiptoe around; unsure which step you might miss that will sink your chances of having a profitable rental property.
Buying your first rental property can be hard, but it can also be very rewarding. Rental real estate can provide incredible tax benefits, stable monthly cash flow, and potential long-term appreciation.
20 Things To Remember Before You Buy Your First Rental
1. The Neighborhood Is More Important Than The Property
A lot of new investors start with looking for the property. The neighborhood is actually way more important than the property. If the property is in a rough neighborhood, it can be difficult to attract good tenants. Good tenants don't want to live in an area where they don't feel safe, or a neighborhood with a lot of boarded up properties.
2. Determine If You Want To Be A Landlord Or An Investor
A landlord will be more hands on role. You will have to find and screen tenants, collect rent, and deal with maintenance issues. On the other hand, an investor will hire a property manager to take care of these tasks. A property manager will typically charge 8 – 12% of the monthly rent. It is more expensive to hire a property manager, but if you don't have the time or the interest in managing tenants hiring a property manager is well worth the money.
3. Narrow Down Your Search To A Few Neighborhoods
It's hard to tell if a property is a good deal if you are looking in too large of an area. Prices can vary from neighborhood to neighborhood. It's best to pick a couple of neighborhoods that you are interested in and become in expert in those areas.
4. Study Recent Sales Comps
The way to become an expert in an area is to be a student of recent sales. Study all of the recent sold comps and look at what properties were listed for, what they actually sold for and the average days on market. Knowing this information will help you move quickly when you come across a potential deal. Great deals typically don't last very long, and if you can move quickly to make an offer, you greatly increase your odds of getting the property.
5. Study Recent Rental Comps
Watch the market and learn how much similar properties to the one you are looking at buying are renting for. Also watch how long they take to rent, and if landlords are offering concessions such as first month free or reduced security deposits. This will help you learn the health of the market, and what you can expect to rent a property for.
6. Put Together A Plan To Find Properties
There are lots of ways to find properties. You can work with a Realtor, wholesalers, network with other investors, call for rent listings and try to find tired landlords, or even probate sales and auctions. I always advise new investors to focus on mastering one or two of the methods above when they are starting out. It can be overwhelming to try to learn it all at once.
7. Gather Your Financial Records
When you talk to a lender, they are going to ask you to provide your last two years of tax returns, two months of bank statements, 90 days of any 401K Or IRA statements, and your last two pay stubs. It's a good idea to work on getting this information together before you talk to a lender, so that it is ready to go when you need it.
8. Get Pre-Approved For A Mortgage
When you find the right property a seller is going to want to see that you are going to be able to get the financing to close on the property. You should always get a letter from your lender saying that you are approved for financing. You should do this early in your buying process. If you are looking for a lender that specializes in rental property loans, check out my resources page.
9. Figure Out If You Want To Buy A Turnkey Property, Or Want To Do A Rehab
There is no right answer here. it comes down to how much time and money you have. Buying a property that is ready to go can be a lot easier. You can place a tenant in the property and start generating cash flow as soon as you close. On the other hand if you buy a property that needs to be rehabbed you are going to have to work with contractors, potential cost overruns, and unexpected surprises. The upside is that you may be able to create equity in the property with a little “sweat equity”. You should spend some time investigating both options to figure out what is the best for you. If you are looking for a recommendation for a good turnkey company, check out my resources page.
10. Start Analyzing Potential Deals
Before you start spending time personally looking at properties. Spend some time analyzing deals. Look at the potential rental income and subtract your fixed expenses such as your mortgage, property taxes, and insurance. As well as your variable expenses such as vacancy, repairs and capex. I put together a spreadsheet that I use to evaluate deals very quickly. You can download it here
11. Tour Potential Properties
After a property looks like it might be good on paper, take a look at it in person. You can get a feel for what a property looks like online, but you really need to see it in person to determine the actual condition.
12. Write Offers
Once you know your comps, and your numbers you will be able to quickly calculate the most you can pay for a property. The thing to remember is that as investors we don't want to pay the retail price for a property. You want to buy a property below market value. You make your money when you buy. You may have to make dozens of offers before you find a seller that will accept your offer. If you keep making offers, you will eventually find a motivated seller that will be happy that you are solving their problem.
13. Get A Property Under Contract With An Out
Always put some contingencies in your contract that will give you time to do your due diligence on the property. For example, you want to make sure that you can cancel the contract and get your deposit money back if you find some serious issues in your home inspection, or your financing falls apart, or your numbers don't work on the property after you get further into the deal.
14. Get A Professional Home Inspection
A home inspector will typically charge a few hundred dollars, and they will inspect the property from stem to stern. They will give you a report when they are done that will show you items with the property that may need to be addressed. Buyers can usually negioate a credit or a reduction in the sale price after the inspection.
15. Get Repair Estimates
After you do your inspection, you will want to have a few licensed contractors give you bids to repair or replace anything to get the property ready to rent.
16. Confirm All Your Numbers
Before you remove all of your contingency from your contract you want to confirm that your numbers still work with any unexpected repair issues that may have come up in the inspection. You should also double check your rental estimate. Maybe even post an ad online to gauge renter interest. (You should get the sellers permission before posting an ad).
17. Shop Title Insurance
This is a cost that most people don't bother shopping around for. But, you can save you a few hundred dollars by making a few phone calls. All you need to do is call a few settlement offices (in some states it will be an attorney's office), and ask what they charge for title insurance. That's it. Just close with the least expensive company or attorney.
18. Get Landlord Insurance Policy Quotes
This is cost that can vary significantly from insurance carrier to insurance carrier. Call a few companies to get quotes. BUT, don't just look at the price. Make sure they are all quoting the same coverage. Check with some local agents to get quotes. If you are looking for a recommendation for an insurance company, check out my resources page.
19. Start Pre-Marketing Property For Rent
It's a great idea to put in the contract that you have to right to market and show the property while it's under contract. If you start advertising right away you may be able to line up a tenant before you even own the property. I just did this on my most recent rental. I closed on a Thursday and my tenant moved in on Monday.
20. Do A Final Walk-Thru
Before you actually sign the paperwork and officially buy the property, you want to make sure nothing has changed with the property since your home inspection. You want to make sure that the current owners didn't do any damage on their way out, or that something major didn't happen to the property right before closing. It's a good idea to personally be there to do the walk-thru. However, you can have someone attend for you. I usually have my Realtor do the walk-thru for me.
If you’re feeling like you’re stuck in the trenches and looking for some inspiration to start your journey, check out my podcast interview with Troy Gandee. We talk about when he got started investing in rentals he had no money or credit. He was fresh out of college and literally had nothing. Today, his wife can stay home with their kids because of the extra money that their rentals produce each month. It's really incredible what you can accomplish in just a few years!
Don’t try to do it alone.
Lastly, don’t go it alone, guys. It’s lonely and scary and stressful and disheartening more often than not in the beginning.
Get some help.
This is the part where I put in a shameless plug for my Rental Income For Beginners Course
No, but seriously, not just my course. If my content didn’t resonate with you, find an investor that you connect better with and take a chance on their course or coaching.
The internet is full of free information, but it’s generally fragmented and insanely time-consuming to sort through.
On top of that, the most successful real estate bloggers, podcasters, influencers, etc. save all of their best information for people that are willing to pay for it. Because they are running a business too.
You’re only setting yourself up for making lots of mistakes at best (or failure at worst) by trying to do it all on your own.
If you liked the article or have any questions for us, please feel free to leave a comment below!
Founder, Rental Income Podcast