15 Steps To Buy Your First Rental Property For Less Than 3K

15 Steps

Everyone can do this.  When I bought my first rental property, I was 25 years old, making 30K a year, with no experience in real estate whatsoever.  I managed to save a little over $2,700 and that is all I needed to close.  Did I turn a profit my first year? Yes, but not as much as I could have.

Buying rental properties may or may not be for you, but it can be extremely lucrative in the long run and aren’t you trying to make money.  Just as a forewarning, you will have the most expensive problems at the worst possible times, but that is what a property manager is for, the headaches.  So long as you understand and accept that you have to pay someone to deal with the headaches, you will be fine.

 

1. It is terribly cliché to say, but the first step in owning a rental property is attitude.

Failure is inevitable.  You will fail, and fail hard.  The goal is to minimize the cost of those failures so your business can keep afloat. Your attitude makes all the difference!  All too often when I tell people that I own rental properties, their first words are either, “How do you deal with tenants?” or “Too many headaches…”

Again, use a property manager.  It may cost more, but it will keep you from burning out.  If you are not fully committed, which I was not when I started, then you are doomed to lose money and fail in your goals.

 

2. The first, non-cliché, step is to have your credit in order.

It does not have to be perfect, but you should at least strive for the best possible score.  Try to be in the high 600s at least.  It seems like such an obvious step, but is one that several people miss.  Plus, the better your credit score, the better interest rate you will get from the bank, which will save you money in the long run and if you are buying rental property and not flipping, you are in it for the long haul.

 

3.  Make a budget.

The sooner you start making a personal budget and sticking to it, the more you realize how much you are or aren’t saving towards your goals.  An added bonus from creating a budget is to start learning how to manage income from one source before you have income from multiple.

This is something that I had wished I had done earlier in my rental property ownership career.  Come tax time the first year, I had all my invoices in an unorganized shoebox.  It was a pain, and I was an idiot for not doing it sooner.  Don’t be an idiot like I was.

 

4.  Minimize your debt if possible.

One of the most important calculations a bank uses to determine if you can afford the loan is the debt-to-income ratio.  This is calculated by using the following equation: ((Total monthly debt)/(Gross Monthly Income)) x 100

So let’s say we use my income when I bought my first rental property of $30,000 a year and do an example calculation.  My gross monthly income was $2500 and my total monthly debt was low, about $235 (I was living with a parent still, it sucked.  You do what you have to.).

235 divided by 2500, all times 100, is 9.4%, which is pretty good.  Try to have your debt-to-income ratio as low as humanly possible.  You may have to sacrifice your standard of living some to save and lower this ratio.  Some will tell you to have less than a 43% debt-to-income.  This is after you add in the monthly rental mortgage payment, but I realistically use 36% and you should too.  Again, the lower the better.

 

5.  Get a pre-approval letter from a bank.

These are typically good for 90 days.  If you aren’t ready to start looking for a property, do not get a pre-approval letter because they will pull your credit.  You do not want your credit pulled more than you need to.  Pre-approval letters do not take long to get, any good loan officer can have it to you in a couple hours given the appropriate info.

The loan officer will ask for your last two paystubs, so have those ready.  He or she should also tell you how much you are approved for, amount-wise, so you do not shop outside of your range.  Another helpful tidbit is to start getting your documents that a loan officer will need together.

Some items they will ask for are: last two bank statements for each account you have money in that you will be using as down payment, last two years’ tax returns, last two years’ W-2s, and possibly your last 401k or IRA statement if you have one.  It helps to have these ready for the loan process later on.

 

6.  Find a decent realtor.

Ask friends, family, and/or coworkers.  Someone is bound to have a good realtor friend.  Vet them first though.  Ask if they know about or have ever sold multifamily apartment buildings.  If they haven’t, that is not a deal breaker, but you will learn a lot more if you have a realtor with this experience under his or her belt.  If you are unable to find anyone, start cold calling brokers or looking them up online.  Someone is bound to pop up on your radar.

 

7.  This is the fun part, finding a rental property.

A realtor will ideally find a multifamily rental property for you, but you are always able to look for yourself.  Personally, I have been through 3 realtors in two years and finally found one that I think does a good job, but I enjoy finding the properties myself on various sites like Realtor.com and Trulia.com.

Realtor.com pulls directly from the MLS (Multiple Listing Service) that the realtors use to find you a rental property.  Trulia does the same thing, but I have found that Realtor.com does this faster, which makes a difference sometimes in finding the best rental properties.  Many of the best properties are under contract within 5-10 days.

If you are buying multifamily buildings, chances are that many of the buildings are not going to be in the best areas, and I have found that Trulia’s crime map helps somewhat, even if it is not entirely accurate.  A drive through the area can confirm or deny your suspicions.

Another site that is invaluable is the county auditor’s website.  It can tell you past sale prices, show you images, give you the previous owners’ names, and all kinds of other good info.  Do not discount using the county auditor’s site.  It is invaluable when searching for a rental property.

Get the most information you can about it.  Overall, finding the right property at the right price is what is going to make you money.  It is the most important step, so spend the most time here.

realtor.com

8.  Go see the rental properties you think are the best.

Schedule a showing with your realtor.  If there are tenants currently, the seller may require 24 hours’ notice before you can see it, so that they may give notice to the tenants.  Inspect it to the best of your ability or take someone with you that knows what they are looking for.

When choosing a property, look for the major expense items like cracks in the foundation (especially horizontal cracks), roof leaks, signs of previous or current water leaks elsewhere, mold, termites, old HVAC, and old windows.  Most items on this list are not a deal breaker for me, so long as the price is right.  Determine, what you can handle and what you cannot beforehand, so you do not get emotionally invested in a rental property you shouldn’t.  I do not do mold, some people do, I just don’t.

My thought process is, how do you know when the mold stops without tearing out walls.  All of these will be looked at in depth with a home inspection once you have the property under contract.  Ideally, you do not want to have to pay for more than one home inspection.  This is why you need to inspect them in depth when you see the property.

9.  Make an offer on the rental property.

Contact your realtor, determine the price you want to pay and the conditions of the offer, and send it over to the seller.  The price is what makes or breaks most people, but depending on how clever your contract or realtor is, you can make money in the conditions of the offer.

Items such as making sure all appliances are left on premises, seller paying some closing costs, etc.  There are all sorts of different pieces you or your realtor can put into your offer, but be aware the seller may not accept it if you go too far.

You will have to put down what is called earnest money when you make an offer.  It can be any amount the seller wants, but a typical amount is between 500 and 1000 dollars.  This money will count towards the total amount if you do indeed buy the rental property.  You will lose this money if you break the contract in the wrong manner.  There are ways to get around this legally.

Granted, I am not a lawyer and this is not legal advice, merely an observation.  One that I have read elsewhere is to put a clause in your offer that states something to the effect of, “subject to business partner approval” and just do not say who your business partner is.  The partner could be anyone.

10.  Once you have an accepted offer, start your inspections.

Typically, there is an inspection period.  It is somewhere in or around 10 days most of the time.  During this time, you can have as many inspections as you want.  A home inspection is a good way to go if you do not know what to look for.  The cost depends on the company, but they are usually a few hundred dollars at least.

You do not have to get one with a conventional loan sometimes, but if you are seeking to buy a rental property with as little money down as possible, your loan will probably require it.  We will talk more about loans and your options below.

11. Talk to your mortgage loan officer about types of loans for you and start the loan process.

The loan process was the part that I was not expecting when I did my first deal.  It can be stressful, but if you have everything together beforehand, it will go much smoother.  To be honest, step 9 and step 10 can run concurrently.  This is important if you are trying to buy a property with as little money down as possible.

There are two major loan options, for most people, a third loan option if you were ever in the military, and a fourth if you live in a rural area.  All options require that you live in the rental property for a year.

https://www.debt.org/real-estate/mortgages/

Options:

Option one, is the FHA owner occupied loan for a first time homebuyer, which requires 3.5% down payment.  This loan option has you pay several fees per month that you do not want to pay if you can help it.  This is what I used for my first loan and was a pain in the butt, but I do own the property now because of it.

Option two, is what I wanted to use, but couldn’t due a missed credit card payment, is the conventional owner occupied loan.  This loan requires a 5% down payment and you pay less fees per month than the FHA loan.  If you are not a veteran, this is the loan I would use.

Option three is only for veterans and current military.  It is the VA loan and does not require a down payment, which is awesome from a return on investment standpoint.  By the way, thank you for your service, if you served.

There is a USDA loan that is a low down payment loan also, but it is an arduous process that I would not recommend at all.  You should know about its existence either way.

There are many other types of loans, but these are the ones that require the least amount of down payment.  Before you close, make sure you have the closing disclosure and review it well.  Whatever terms are in there will be set in stone once you close, whether you were promised something else verbally or not.

If you don’t understand specific portions of it, Google can be your best friend or you can email me at Feedback@PlusFourZeros.com and I will help.

12. Find an insurance agent.

You will need an insurance agent in order to acquire a quote.  Shop around a bit.  Not all insurance is the same or the same price.  If you attend your local real estate investment association meetings, which would be recommended, they may have an agent you can use and get a better rate. Insurance agents are somewhat similar to realtors with relation to quality.

13. Wire the down payment to the title company a couple of days before closing.

Wiring the down payment is something that has recently changed.  Make sure you have the wire instructions before you schedule the wire.  Something to note is that scammers have lately been doing is emailing fraudulent wiring instructions to bank customers.

Contact your loan officer or loan processor before you wire any money and ask them whether or not the wiring instructions are legitimate.  It is worth an email or phone call to not wire the money to the wrong person.

14. Close the rental property or real estate.

This involves signing a ton of paperwork.  It is not difficult, but again, read the documents you are signing before you sign them.  In my most recent closing, they had several pieces of information incorrect.  Once you have signed everything, there is one last item to do.

15. Celebrate!

You are now a rental property owner and possibly a landlord if you have not yet hired a property manager.  Congrats and good luck.

By Trey Stevens

Feedback@PlusFourZeros.com

Learn what I did wrong or right from My Journey in real estate and rental properties OR check out other articles on my Blog.

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