How to Buy Your First Rental Property for Investment (Step-by-Step Guide)

So what to look for when buying a rental property in the first place?

When thinking of how to start buying rental properties, it’s essential to determine your investment goals.

Your investment goals can play a significant role in the success of your real estate portfolio.

Knowing how much money you’re expecting to make and within what time frame will help you determine the real estate investment strategies you should implement.

Whether it’s buying a second home for rental and keeping it for additional income to your day job, or creating a portfolio of rentals that grows until your full financial freedom, understanding your financial goals is key.

At the same time, you should consider the amount of money you have in cash, your credit history, and other factors affecting your possibilities to obtain the financing matching your goals.

Let’s look at some of the most common exit strategies for real estate investors used today.

BRRRR Strategy

Rather than fighting out how to buy a rental house for investment, you may want to know how to buy multiple rental properties to build your portfolio fast.

The Buy, Rehab, Rent, Refinance, and Repeat (BRRRR) strategy answers this question. It involves buying properties that need some work done to them before they can be rented out.

Buying abandoned properties or just fixer-uppers tends to cost less than turnkey rental homes in good condition. Therefore, focusing on run down properties allows you to grow your portfolio faster.

Many real estate investors who look into fixer-uppers prefer to work with local real estate wholesalers.

These professionals find cheap properties that need work and would make a good investment. They put them under a contract and sell the contract to investors (also known as ‘assignment of contract’).

There are many ways to find real estate wholesalers such as attending local real estate investment clubs and real estate investing events.

But an easy shortcut is using HouseCashin’s directory of local real estate wholesalers.

That said, you can also search for wholesale properties for sale on HouseCashin’s investment property marketplace. All of those properties are listed by wholesalers.

Traditional lenders don’t normally finance properties needing rehab, considering them high risk. So for many BRRRR investors, hard money loans are a go-to option.

Once repairs are complete and the property is up to code and ready for tenants, it is then rented out for rental income.

By rehabbing the house, the investor creates extra equity that they can convert into cash by taking a cash out refinance loan later down the road.

This loan has a lower interest rate than what was originally borrowed and provides extra cash that can be used as a down payment for the next fixer upper.

The investor can then repeat this process over again until they have grown their portfolio to a desired size.

The BRRRR strategy means a long path to reaching financial independence. If you are planning on becoming a professional investor, consider finding a real estate investor mentor.

To find one easier, look through the HouseCashin’s directory of the best real estate investing coaches.

Buying Turnkeys

An investor who wants to invest but doesn’t have time to manage renovations can go down the turnkey route instead.

This involves buying rental properties that are already fully renovated and ready for tenants — often referred to as “move-in ready” homes.

Although turnkey investments do cost more upfront due to renovation costs being taken care of in advance, they can be appealing due to their ability to be rented out immediately.

There is even an option of buying investment homes in good condition and with tenants included and cash flow in place.

The drawback of buying a turnkey rental property is that you can’t be sure the renovations were made with appropriate quality.

If they weren’t, after some time, you may face frequent maintenance and repair requests from your tenants costing you extra time and money.

Long-Term Rentals

Investors looking for steady income can opt for long-term rental investments.

These are usually buy-and-hold investments which involve purchasing one or more rental units, such as townhomes or multifamily dwellings.

They are rented out on a month-to-month basis over an extended period of time (usually 5 years or more).

This strategy allows investors to enjoy the benefits of rental income while avoiding short-term fluctuations in market conditions, which could cause disruption in their income stream.

Short-Term Rentals

Investing in short term or vacation rentals provides higher profits but it also requires more frequent maintenance.

The best places to own a short term rental property are locations with high tourist traffic. Needless to say, the more popular the place is the costlier the properties are.

With this type of investment, not only will you need to take care of regular property maintenance and repair, but also meeting clients and cleaning after them on a day-to-day basis as well as handling more frequent disputes.

Once you have worked out a budget and strategy, it’s time to consider the type of rental property that best suits your needs.

You’ll need to research local markets to determine what type of rental property will generate the highest returns on your investment.

There are many options to choose from when it comes to residential real estate investment:

• single-family homes
• condos
• lofts
• multifamily dwellings (from duplexes to apartment complexes)
• mobile homes or mobile home parks
• townhomes
• cabins

and more.

Buying single family rentals such as houses or condos is usually a good option for first-time investors since they involve less risk than multifamily properties.

They also tend to offer a greater potential return on investment because of their lower price point and easier management requirements.

On the other hand, buying multifamily rental property, like duplexes or triplexes, provides higher rental income potential, but they also require a higher upfront investment and the management of multiple tenants.

If you’re looking for an economical option, consider investing in mobile homes.

Although they may not offer the same return as other real estate investments, they provide a low-risk way to get started in the rental property business.

Luxury real estate is an option for investors who are willing to take on more risk and have plenty of capital to invest.

Designed explicitly for affluent buyers, these properties come with added amenities that can help maximize your return on investment over time.

Your investment property must match the neighborhood it’s located in. You don’t want to buy a luxury home in a rather low income neighborhood as this would pose a difficulty finding tenants.

Before purchasing a rental property, it’s important to find the right real estate investment market.

Investing in rental properties requires careful research on the local real estate market and economic conditions.

It seems the easiest way to just buy a rental in your city. But many investors prefer buying rental property out of state if the market is better there.

While analyzing a market where you consider buying a rental, look at factors such as population growth, job opportunities, school quality, crime rates, infrastructure developments, and local taxes.

Also, rent control laws should be considered when selecting an investment market.

To learn about your target market and to compare its demographic and real estate stats to others, use HouseCashin’s real estate investing guides by market.

Once you’ve selected the market, look at the investment properties for sale to understand what options are available there.

In addition, HouseCashin developed proprietary metric called Favorability Score (FS) that helps investors analyze geographical markets across the United States to uncover potential real estate investing opportunities.

You can take advantage of this useful technology absolutely FREE to analyze the following investment data:

• Best states for real estate investment

Finding one of the best real estate agents for investors in your area is key to successfully navigating the rental property market.

An experienced and investor-friendly agent can help you identify the types of properties that are likely to appreciate in value over time.

They will also give you tips for buying a rental property that you can apply later in your investment career.

They will also alert you when potential deals become available and provide you access to off-market properties, including buying short sales, REO, probate sales, etc.

Additionally, an agent might be able to provide advice on local laws and regulations that could affect your purchase decision.

They will provide analyses of neighborhoods or properties you are considering to buy to help you choose a rental home with the best potential.

When it comes to searching for a real estate agent, look for someone who specializes in investment properties -– they should have experience evaluating both short-term and long-term potential returns on investments (ROIs).

From there, the process of buying rental real estate is very similar to buying a house as a residence.

Getting pre-approved for financing is an essential step in the process of investing in your first rental property.

Pre-approval will give you a better idea of how much money you can expect to borrow, allowing you to assess the potential profitability of any potential investment properties more accurately.

It also helps demonstrate to sellers that you are a serious buyer and may help you negotiate more favorable terms on the purchase of the property.

To get pre-approved, you’ll need to provide some documents that prove your financial stability, such as pay stubs, bank statements, tax returns, and other evidence of income.

After providing these documents and filling out an application, lenders will review your finances and give you an estimate of the amount they would be willing to lend you.

Once pre-approved, keeping your documents up-to-date and maintaining good financial habits as you look for investment properties is important.

This will show lenders that you are creditworthy and demonstrate your commitment to taking on a property that may require financing.

Now it’s time to think of how to go about buying rental property.

Knowing what features to look for and which ones to avoid when investing in rental property will help you make smart decisions and save time.

Look at the demographic trends of the neighborhood of each property that you consider as a potential purchase.

Look for neighborhoods with growing and young population, good schools, low crime rates, and close to public transportation or major highways.

These areas will generally attract more renters and have higher property values, meaning that you’ll get a better return on your investment if you decide to sell the property down the line.

Once you’ve identified an area that meets your criteria, it’s time to evaluate the condition of the actual property itself.

Are there any major issues like mold or water damage? Are all of the appliances functional? Do all of the windows and doors open properly? Is there any structural damage that needs immediate attention?

Unless you are experienced in home repairs, steer clear of properties that may have mold issues, water damage, or require extensive renovations — these could cost you far more than they’re worth.

Before signing an agreement, research local laws and regulations. This includes:

• zoning regulations (are there special requirements for being a landlord?)
• tenant rights (what kind of notice must be given before entering a tenant’s home?)
• rent control (are there limits on how much rent can be charged?), etc.

Understanding these laws will enable you to protect yourself from potential legal issues.

Part of your real estate agent’s role is to offer an in-depth analysis of a potential property’s neighborhood, conduct inspections, and research relevant laws and regulations regarding renting.

Buying rental property is a good investment unless you fail to conduct proper due diligence and spend money on a house that isn’t worth it.

Before making an offer on a rental property, conducting pre-offer due diligence is essential.

This includes researching the neighborhood and surrounding area, inspecting the parcel yourself, reviewing the comparable rental analyses, and making your calculation.

Learn the full list of things to know before buying a rental property by reading this real estate due diligence checklist.

Financing options will depend on your credit, current financial situation, and preferred strategy.

Some popular financing methods include conventional mortgages, hard money loans, and home equity lines of credit (HELOCs).

Let’s take a look at some financing methods.

Cash

Buying a rental home with cash means you won’t have any monthly payments or interest charges.

Additionally, by buying rental property with cash, you can get a discount from the owner as they won’t have to wait until you get financing.

Being a real estate cash buyer may be a good option if you have enough money saved up in liquid assets.

But it does mean that all of those funds will be tied up in the purchase of your rental property and could delay other investments you may have been planning.

Depending on how much cash you have, this may not be the best option if you want to build a portfolio of rentals rather than buy one rental unit.

Conventional Mortgages

Most landlords use conventional mortgages when purchasing their first rental property because they typically have lower interest rates than other financing options.

With this type of loan, there are usually fewer restrictions on the types of properties that qualify and the amount you can borrow is generally higher compared to other loans available.

However, lenders require good credit scores and large down payments (usually 20%) to qualify for these loans.

Hard Money Loans

If you don’t qualify for conventional mortgages or don’t want to wait through a lengthy approval process, hard money loans are another option to consider.

These loans are offered by lenders who specialize in BRRRR, fix-and-flip, and other high risk real estate projects.

Loan terms tend to be short — typically 1-3 years — and interest rates are usually higher than conventional mortgages.

On the plus side, these lenders often offer more flexible repayment plans than traditional lenders and require less documentation from borrowers.

The underwriting process is also easier and quicker.

Hard money lenders can provide loans even to borrowers with poor credit ratings.

However, they require a detailed presentation of an investment project to make sure they are lending on a viable deal.

Here is an article on how to get a hard money loan and another one on finding hard money lenders to finance your projects.

Home Equity Lines of Credit (HELOC)

Home equity lines of credit (HELOCs) allow homeowners to tap into their existing home equity in order to finance real estate investments without having to take out a new loan or refinance their current mortgage.

HELOCs typically offer lower interest rates than many other financing methods but they can also come with higher fees and closing costs which should be taken into consideration when making your decision about which loan option is best for you.

401(k) and IRA Funds

There is also a way to buy a rental property with self directed 401(k) funds, as well as IRA money.

Self-directed 401(k) real estate investing isn’t a very well-known method but it’s quite convenient for those having enough funds in the account and unwilling or unable to take out a loan.

Once you’ve completed your due diligence and decided on financing, you can make an offer to purchase the rental property.

Most offers are made in writing and include the purchase price, any contingencies on the sale, earnest money, and closing date.

The seller may counter your offer or accept it as is. If they don’t agree to terms you can live with, then you can walk away from the deal or try to negotiate better terms.

If the seller agrees, you will sign a purchase contract with them.

A purchase contract for real estate is a legally binding agreement between the buyer and seller.

The basic terms of the contract include the sales price, financing arrangements, closing date, disclosure requirements, and any special provisions required by law or requested by either party.

The purchase contract should also stipulate who pays various closing costs, such as escrow and title fees.

It’s important that the contract also address any potential liens or encumbrances on the property, such as taxes due, HOA dues that are unpaid, etc.

The contract should specify what inspections will be conducted prior to closing, including a home inspection and termite inspection.

The contract should also outline any repairs, modifications or upgrades that must be completed before closing.

It’s important to take into consideration all of the contingencies included in a purchase agreement and discuss them with a real estate attorney who is knowledgeable about local property laws.

This can help ensure that your rights as a buyer are protected and that you understand all of the terms and conditions of your agreement.

What is Post-Offer Due Diligence?

Post-offer due diligence is essentially an in-depth investigation that takes place after an offer has been accepted.

During post-offer due diligence, buyers will investigate potential problems with the property that could impact their decision to purchase it or give them a reason to renegotiate the price.

This may include anything from structural issues to zoning changes or even environmental hazards.

Read more on post-offer residential rental property due diligence.

Can Buyers Quit After Post Offer Due Diligence?

Yes, buyers can quit after performing post-offer due diligence if there are any problems found during their investigation that make them decide not to move forward with the transaction.

Normally, a contract contains a due diligence contingency. It allows the buyer to back out of the deal within a certain time (normally up to 14 days) from signing the contract, for any reason.

A loan contingency can also allow you to quit the deal if you can’t obtain financing for the property.

When buying rental property with tenants, you may come across difficult renters unwilling to let you or an inspector in. This can also be a reason to back out of the deal.

Likewise, there are many other contingencies that allow you to back out of the deal without losing your earnest money deposit.

Once you’ve received all the necessary loan approvals, it’s time to close on your rental property.

The closing process typically takes about 2-3 weeks and involves signing a lot of paperwork and transferring funds for the purchase.

The closing itself lasts for only a few hours on the closing day.

The closing is conducted by a closing attorney or title company, depending on the state. Select one of the best investor-friendly title companies in your area.

It is also necessary to ensure that you have obtained proof of insurance before closing, so there are no delays.

Once your rental property is purchased and closed on, you’ll begin to manage it as a landlord.

And as your portfolio grows, you may want to consider hiring a property management company that can basically turn your cash flow into passive income.