Buying rental property can be an exciting pursuit filled with adventure, risk and, potentially, large financial profits. However, one of the most challenging dynamics with buying and investing in rental property is knowing how to get started.
While a single blog post couldn’t possibly encapsulate all the nuances of buying rental property, I’m going to attempt to cover many of the main topics. So, buckle in, and let’s get started.
Know What You’re Getting Yourself Into
Before I even attempt to break down the topic of buying rental property into bite-size pieces, I feel the need to paint a realistic picture of what being a rental property owner is like.
It’s all too easy to romanticize what buying rental property will be like. With the rising popularity of house-flipping shows, the idea of becoming a real estate investor seems like a life worth dreaming of.
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However, like many things in life, investing in real estate isn’t as glamorous as cable television makes it out to be. I’m not saying it’s not enjoyable or that it’s not a wise business pursuit, but you should be sober-minded and do your research to get a realistic view of what it will be like.
So, what does buying rental property and investing in real estate look like?
If you ask ten real estate investors what real estate investing is like, I imagine you’d get ten different answers. Your experience will depend on a wide array of factors such as your location, whether or not you have business partners, your goals, the type of property you invest in, and so on.
The best I can do is share from my own personal experience.
Let me start off by saying that owning rental property is hard. That’s not to say it doesn’t have it’s pretty days or that its not enjoyable at times, but it is hard. It’s certainly not for the faint of heart.
I’m sure this comes at no surprise, but I’ll say it anyway, buying rental property requires a large financial commitment. Whether you use your own cash or borrow the funds, You’ll be investing large sums of money.
Additionally, rehab costs can be tough to estimate, tenants can make your life stressful, and you have to deal with outside threats like vandalism, weather, pests, neighbors…the list, unfortunately, goes on.
I don’t mean to scare you off, but that’s just the reality. However, there are a lot of positives to investing in real estate.
To start, there are a number of financial benefits such as tax write-offs, monthly cash-flow from rent, long-term appreciation (increase in real estate value), and the satisfaction of having a business and owning real estate.
As someone who has purchased, rehabbed, rented & flipped dozens of properties, I’ve experienced the high and the lows, and I’m still investing in real estate.
Take it slow. Buy one property, fix it up, and really soak in the process. Remember, the process doesn’t end with the rehab. You have to market your property, find & screen tenants, and function as a landlord (unless you hire a property manager which I don’t recommend).
So, do all that, and then decide if you want to scale up and build a real estate portfolio.
I know there are guys who buy properties in packages, but I really don’t recommend that, especially for new investors. Make your mistakes on a small scale. You’ll be glad you did.
Start With Single-Family Properties
There are different types of properties you can choose to invest in, but I believe single family homes make the best investment properties for most of us.
It might be tempting to consider a multi-family property such as a duplex or an apartment building, but I strongly suggest single-family homes. They are the easiest to acquire and usually cash-flow much better than multi-family homes.
Additionally, when it comes time for you to sell, there is a much larger market for single family homes than multi-family properties.
So, what kind of single-family properties are best?
I find that 2-3 bedroom houses ranging from 800-1500 square feet make the best rentals. Bigger houses come with bigger problems, and I’ve also found that larger properties lead to tenants moving in friends and family without you knowing about it. You don’t want that.
Find Investment Property Deals
The obvious thing to do when looking for investment property deals is search real estate sites like Realtor.com. While that’s a good start, there are a number of other ways to find great deals that many of your investor competitors likely aren’t exploring.
When a property owner defaults on their mortgage and the lender forecloses, the bank or government entity that subsequently owns the property attempts to first sell the property at auction before hiring a real estate agent to sell the foreclosure on the open market.
Oftentimes during the auction phase, foreclosures are not promoted on major real estate sites. You need to check out various foreclosure and auction sites instead. Here are some of the more popular ones:
I’ve also written an extensive blog post on buying foreclosures. You can find it here.
Using MLS is another great way to find real estate deals. MLS stands for Multiple Listing Service. It’s a tool real estate agents have access to, and the filtering capabilities are much more robust than sites like Zillow, Trulia, Realtor.com, etc.
Start working with a local real estate agent who can pull MLS lists for you.
Figure Out Your Acquisition Strategy
Acquisition strategy can mean different things, but in this context, I’m referring to the number of properties you’re looking buy over a certain period of time.
Do you want to buy one property per year or one per month? That kind of thing. Not only is this good to figure out for your own purposes such as for business planning, but it’s something the banks will likely ask you as well.
Know Your Financing Options
It’s likely the idea of real estate financing has popped into your mind a time or two as you’ve entertained real estate investing. Well, the good thing is there are a number financing options available to real estate investors. Check out my post on investment property loans, for the full skinny on this topic.
Find The Right Agent
It’s rare that you can solicit someone’s professional services for free, but that is exactly the case when you work with a real estate agent. It’s no cost to you (at least when you’re buying). This is because sellers typically pay all real estate commission.
Finding an agent is easy; finding a good agent, and more importantly one that’s a good fit for your needs, is not so easy.
I’ll tell you this – just because someone is a real estate agent doesn’t mean they know anything about real estate. Everything I’ve learn about real estate has been through years of experience as an investor. What I learned in a classroom to satisfy real estate licensing requirements, hardly taught me anything of real value.
Make sure you find an agent who has not only been in the real estate game awhile, but also seek out someone who has worked with investors, is proactive and actually willing to work for their commission.
There is certainly an art to negotiating, but there are a number of things you can do to put yourself in the strong position.
Possibly the best way to drive the purchase price down is by paying with cash.
To a seller, a cash buyer is someone that can close the deal faster and doesn’t run the risk of being denied bank financing.
Now, if you’re like me and most other people on this planet, you don’t have vats of extra cash stored up to buy real estate with, but there are ways to borrow the cash you need. Check out this post, for an in-depth explanation of how to pull this off.
Seeking out foreclosures, motivated sellers, and properties that have sat on the market for lengthy periods of time also give you greater negotiating power. For more on this topic, check out my post on real estate negotiating.
Promoting Your Rental Property
It’s no surprise that the internet is the best place to promote your rental property to people looking to rent. However, with so many places to post, where do you start? Also, is there technology that can automate this process for you? Yes.
Possibly one of the biggest mistakes I see entrepreneurs make is not valuing their time. I once met a lady who spent 8 hours a month doing her own payroll because she wanted to forego an online payroll service and save $50/month. Apparently, her time wasn’t worth more than $8/hr.
Here’s another post that goes into more depth on where to advertise your rental properties, and how to use technology to do all the heavy lifting for you.
How To Properly Screen Tenants
I’ll tell you right now – bad tenants can bring you to financial ruin. Screen your tenants, and screen them well.
When you’re just starting out, and you’ve got your first rental property listed, getting those first few inquiries from folks interested in renting from you, can feel great. Hey – someone is interested in my rental property! Yeah!
However, don’t let emotion get the best of you and cause you to make impulsive decisions. Screen all applicants well.
Now, you’re probably asking, “How do I screen tenants well?” Well, it just so happens that I wrote a post that covers that topic as well. Learn more about screening tenants, here.
Buying rental property can be a very rewarding pursuit, but it’s essential you prepare yourself as much as possible. The rewards are great and so are the risks. Align yourself with mentors, and take in as much information as possible on real estate investing. I hope you enjoyed this blog post. Please subscribe, so we can send you more tips to help you succeed.