How to Buy My First Rental Property (Part 1)

Step 1: Know Your End Goal In Buying a Rental Property

Understanding your end goal is the first step towards purchasing an investment rental property.

This end goal should rely on realistic expectations, your financial capabilities, chosen investment strategy, and the answers to the following questions.

1. When do you plan to retire and how much money will you need to cover all of your expenses?
2. Do you have any current retirement income sources?
3. How much money do you plan on investing in purchasing rental properties (and other real estate investment opportunities?
4. Do you need immediate cash flow?
5. Do you need to diversify your portfolio to reduce risk, maximize returns, or lower taxes?

These above types of questions will help you keep sight of your end goal as you begin to choose an investment strategy that works fits your needs while considering your first potential rental property investment.

Step 2: Network, Network, Network!

Remember to always network with other experienced rental property owners. The next step in your real estate investment journey is to speak to others that already have rental properties. Trust us; rental property owners love to chat about rental properties. Talking to others who are investing in the same area (and types of homes) that you are interested in can make all of the difference in the world.

Find these folks at meetups, online forums, and drive the neighborhoods you want to buy houses in and call the for rent signs. When you speak with your mentors and other landlords, remember that they all have their favorite money-making methods, which have molded them into who they are. This fact means they all have their strategy down and likely won’t stray far from it. While these people have carved out their path, remember you’re looking for a plan that excites you. If you’re lucky enough to find someone precisely doing what you want to do, then you’re golden.

Landlords all have their own experiences, purchasing strategy, and, most importantly, endgame goals.

Finding investors with similar goals will accelerate your growth and limit your failures.

Step 3: Save the Down Payment

Here is the blunt truth, rental properties cost money. You need money to purchase, and then you need more money to maintain them. Honestly, you shouldn’t buy a rental property unless you have enough for both.
When you start looking for your first rental property, it’s essential to keep in mind how much money is necessary for a down payment. Ideally, you’ll want to have 20% – 30% saved before you even start looking. This amount allows you to know what you’re looking for and the confidence you need to know you call pull it off.

Also, when you start looking for an investment opportunity, you need to have already applied for loan pre-approval.

Here are five tips that can help you save for a down payment.

1. Pay off any debt that you currently have.
2. Set up an automatic savings deposit.
3. Lower your rent
4. Drastically reduce unnecessary living expenses
5. Take on a second job.

So many ways to save, but this is a necessary step, so you had better figure it out quickly because if you never save the necessary funds and keep looking for the “I have no money” way to buy rentals, you will be waiting for a very long time.

After you get real good at this method, you can try a more advanced technique.

Step 4: Understand Rental Property Expenses

All rental properties have one thing in common. EXPENSES. Before you purchase a rental property, you must know all about the potential monthly, yearly, and unexpected expenses that the property will have. Over the long run, expenses will cost you approximately 50% of gross rents. This amount is just an estimation, but understanding the general expenses is essential to being able to make a profit.

The expenses everyone thinks about are repairs, insurance, management, etc.

The second level that people often forget is capital repairs like a roof, water heater, HVAC, etc. These repairs only come up once in a while but will blow your socks off if you’re not prepared.

The third level of repairs is the one you can’t see, like vacancy, deferred maintenance, tax, and HOA increases over time, evictions, CPA, and other professional costs.

These repairs don’t happen in the ordinary course of monthly rent collection and repair cycles, so people rarely account for these when analyzing a property. We have a friend that just got hit with a 20k bill from his out of state turnkey property manager for a broken pipe under a concrete slab foundation; Talk about a scary expense. While there is no real way to prepare for a cost like that, it is essential to know that they are possible and that you need to set aside money for anticipated and unexpected repairs.

Want to play it safe?

Have at least six months in cash reserves saved. These funds will be especially useful if you have to conduct any emergency repairs, or if your property sits vacant for a long time.

Step 5: Get Pre-Qualified for a Rental Property Loan

Pre-qualification will help you better understand what type of investment property you can afford to purchase. You can go to any lender to get pre-qualified. A banker, a loan officer, a mortgage broker, you name it. Here are a few helpful tidbits that will help you get qualified.

1. A credit score of at least 680 (an ideal score is 740 or higher). You don’t have to have this high of a score, but it will be helpful to so make it a priority to clean up your credit score.
2. Two-year job history is beneficial. Self-employed individuals will need to prove their financial stability and monthly income for the past 3 to 5 years. Banks love W2 income.
3. Have the required liquid cash for the down payment. If you read the last couple of steps, you are on your way to this target. Lenders love to see this right off the bat, but don’t let it stop you from going and talking to a couple of lenders.
4. Be ready to show your lender the cash reserves you have available for at least six months of expenses.
5. Maintain a consistently low debt to income ratio. Conventional mortgages require this for underwriting (at least for now).

There it is. Something that anyone reading this article can do. Take action. It’s on you now to build STEALTH WEALTH.

Stay tuned for Part 2…