Only real estate investors with dozens of rental properties in their portfolios understand how lucrative this investment is. Not only do they gain massive annual profits, but they also build up wealth in the equity of their properties. This is why owning and renting out residential real estate has long been considered one of the best ways to build personal wealth over time. However, in order to reach this level of success in the real estate investing business, you have to take the initial step of buying your first rental property. If this is one of your goals, then keep reading to learn how to buy rental property in 7 easy steps!
Step 1: Do Your Homework
If you’re reading this and similar blogs, then you’ve already taken the first step of buying an investment property. The best thing beginner investors can do to ensure they make the right decisions is to learn as much as possible about real estate investing from the get-go. This will help you determine and create a checklist of the basic aspects that you’re looking for. Start by answering some simple questions to determine the best investment property for you. For example:
- Where do you want to buy your first rental property? To answer this question, you’ll need to do some research on what makes for the best places to invest in real estate. These include the supply and demand of homes for sale, median property prices, the average rent, and more. Knowing this helps you decide whether to invest in your local market or out-of-state.
- What kind of investment property do you want to buy? For most beginner investors, the answer is a single-family home. However, some may be interested in buying a duplex rental property that can generate multiple rental incomes at the same time. So, learn the pros and cons of different rental property types to determine which one suits you best.
- What is your budget for investing in real estate? Some beginner investors fail in the business not because they don’t know how to buy rental property, but because they believe that the more they spend, the more income they will make. While this is true to some extent, it’s also possible to turn a profit on low-cost properties. So, determine how much you are comfortable spending or borrowing to buy an investment property and try to stick to it as you search for rental properties for sale.
Related: Questions to Answer Before Buying an Investment Property
Step 2: Get Pre-Approved for a Mortgage
Most beginner real estate investors don’t have a large capital to buy an investment property in cash and, instead, finance their purchase with a mortgage. If this is your financing method as well, then don’t wait too long to get pre-approved by your mortgage lender. This step of how to buy rental property is important for 2 main reasons:
- It gives you an idea of the amount of money that you can borrow. This helps you better determine the type or price range of rental properties that you can afford to buy and, in turn, helps you focus on searching for these properties.
- It gives you an advantage over other real estate investors trying to compete over the same rental property. Sellers are more motivated to make a deal if you’re pre-approved as they see that you’re prepared and serious about your purchase.
So, go to the bank and ask about the different types of investment property mortgage loans and decide which works best for you. In addition, remember that financing a real estate investment property comes with mortgage interest rates. Make sure you know what the interest rate in your housing market is and account for it in your budget for buying rental property.
Step 3: Research and Analyze Potential Markets
One line you’ll hear a lot in the real estate investing business is “location, location, location.” Of course, there are many other factors that play a role in your success as a real estate investor (like your personal skills, level of commitment, etc.), but the importance of the location where you choose to invest can never be underestimated. Therefore, once you learn how to buy rental property, research the most profitable real estate markets for property investors.
Start by reading recent reports by trustworthy sources like the National Association of Realtor (NAR) and dive into our real estate investment blog to learn about the trends in different markets at the moment. Also, focus on researching affordable markets where you can buy an investment property within your budget. For example, if you’re looking for a rental property for sale that doesn’t cost more than $300,000, then there’s no point in researching the California real estate market.
After finding a few potential markets, start digging a little deeper by conducting a real estate market analysis. This step includes gathering historical data for different metrics (like the cap rate, property price, average rental rate, etc.). These real estate metrics help property investors predict how the housing market is likely to perform over the long-term. You want to buy an investment property in a location that is growing to make sure you’ll have a good return on investment and be able to build equity in your property.
Related: How to Perform a Real Estate Market Analysis
Step 4: Start Searching for Suitable Properties
Once you decide where to invest in real estate, the next step of how to buy rental property is searching for that property. At this point, you should already have a set of criteria that you want to find in a property for sale. Another thing to keep in mind is to find 5 – 10 similar properties that are worth looking into.
Even if you think you’ve found the perfect investment property, keep searching for others. The more options you have, the more likely you are to find a property that meets your criteria. The number of rental properties for sale you find will vary based on the supply in your housing market as well as the criteria you set.
Online listings can be helpful in this step of how to buy rental property, as they typically list square footage, bedrooms, bathrooms, utility information, as well as show pictures of the inside of the property. But why sift through tons of listings when searching for investment properties when you can find them right here on Mashvisor with a click of a button? We help real estate investors make smart investment decisions using advanced tools, one of which is the Property Finder.
With this tool, you can search for investment properties in up to 5 different real estate markets. Then, use the different filters to narrow down the listings to those that match your exact criteria. Even better, they will also be the investment properties with the highest cash on cash return in those markets!
Do you have a free Mashvisor account? Use our Property Finder to find lucrative investment properties that match your criteria in a matter of minutes!
Step 5: Narrow Down Your Options
In many ways, the first rental property in an investment portfolio is the most important, as its success or failure oftentimes determines whether or not an investor will commit to investing in real estate. If you select the best available rental property, you’ll be more likely to succeed as a real estate investor. This is why the investment property analysis step is crucial for how to buy rental property.
Related: The Beginner’s Guide to Rental Property Analysis
There’ll be properties that you quickly decide don’t meet your standards. However, you need to do an in-depth analysis of at least 3-5 investment properties. Start by comparing each property’s potential rental income to its price, and you’ll be left with only 2-3 properties that stand out as offering the highest potential return on investment.
Then, use an Investment Property Calculator to plug in the financing details, startup costs, and estimated monthly expenses. The tool will then give you an estimation of the return on investment expected from the rental property. If the ROI doesn’t meet or exceed your criteria, you can move on to the next property. If it does, you can make an offer.
Want to give our Investment Property Calculator a try? Click here to start looking for and analyzing rental properties in your city and neighborhood of choice.
Step 6: Home Inspection + Appraisal
If your offer has been accepted, you’ll need to hire a licensed home inspector to fully inspect all major systems of the rental property and issue a report. Every home will have something. Real estate investors should know what they’re buying and get sellers to address some issues that were unknown. You can also have a contractor stop by to get a scope of the needed work and give bids on any repairs that are required.
This step of how to buy rental property will give you an idea of what the actual cost will be. Based on all of the findings from the home inspection, property investors may re-negotiate the deal with the seller or ask for repairs after crunching the numbers.
Once you’re past the home inspection step and things are moving forward with the property, your mortgage lender will order a home appraisal.
The appraiser may catch additional things and require fixing them before closing the loan. The types of things appraisers look for are run-down roofs, rotten siding, chipping paint, exposed electrical wires, plumbing leaks, etc. In addition, while you are waiting on the appraisal, work on getting insurance for the investment property as lenders ask for an insurance binder from your insurance agent in order to close.
Step 7: Close the Deal
Finally, once all the other steps of how to buy rental property have been completed, it’s time to close the deal. Real estate investors need to make sure to have all the documents required to close the deal. Moreover, keep in mind the different closing costs that may come up when finalizing the sale of the investment property. So, ask your lender for a list of closing costs that may apply to you as the buyer, and ask your real estate agent for a list of any other related costs.
So that’s it. These are the 7 steps of how to buy rental property! Of course, each real estate deal can have a different strategy and different states might have different requirements from real estate investors. Nonetheless, these steps are generally consistent in all investment property purchases.