How To Buy Your First Rental Property
“Don’t wait to buy real estate. Buy real estate and wait.”
Will Rogers (Actor & Commentator)
So you want to buy a rental property? 🏠
You’ve been thinking about this for months, years even. You’ve known for a long time that real estate is a worthwhile investment, but it’s always been theoretical, something you’ll get to “eventually”. But something has changed in you. Maybe you decided you don’t want to be a tire kicker anymore or maybe the W-2 rat race has finally gotten to you. Whatever the case, you decided you were going to take action and you were finally going to buy your first rental property. Well my friend, you’ve come to the right place. 😏
But before we get down to brass tacks, let me tell you a story of how my wife and I became accidental landlords…
We became real estate investors by accident 🙃
At the beginning of 2022 (when literally everyone was trying to buy a home because of the low interest rates), my partner (now wife) and I really wanted to buy a home in Pasadena, CA where we lived at the time. We fell in love with a particular house - a 4 bed 2 bath, great neighborhood, backyard, pool, and a fully detached guest house! We put, what we felt, was a really competitive offer and we started planning how we would furnish our dream home. That dream was short-lived, however, as our agent called us back to inform us that we were the “lowest of 40 offers”. We couldn’t believe it. To make matters worse, this was the trend for every property we offered on in California. We were completely priced out.
So we did what most dejected Californians do….we decided we were going to move and buy property in a different state (apologize in advance 😅). Since we wanted to stay on the west coast, we decided that we were going to buy in the great city of Portland, OR. Despite still being a surprisingly competitive real estate market, we were able to purchase our very first property, hurray! As life would have it, however, my wife then got a dream job that required us to stay in California (Portland was a no go). But what about this house that we just bought? 🤷🏻
At the counsel of our real estate agents, we listed our property for rent with the help of one of the local property managers in the area. Much to our surprise, the place rented out in <1 week and the rental income was more than enough to offset the expenses. We now owned a cash flow producing asset, completely unintentionally. This was a light bulb moment for me. 💡
Today, we now own a portfolio of rental properties (all out of state), and we’ve learned so much a long the way. I wanted to write this post because I believe anyone can become a real estate investor with the right tools, education, and support. Real estate can be incredibly overwhelming, but once you get a firm grasp of the process end to end, it doesn’t seem so scary.
So without further ado, let’s break down the 10 steps to buy your first rental property!
Step 1 - Determine Your Goals & Budget ⭐
Let’s take driving a car, as an example. If you don’t know your destination, you’ll be driving aimlessly for miles and miles, wasting gas. The same will be true for real estate.
Why are you investing in real estate in the first place? What are your goals? There are so many different paths to venture down in the real estate investing space that you really need to get clear on what you’re trying to accomplish. Do you want to replace your W-2 income in 10 years? That will lead you down a path. Do you to prioritize cash flow more or appreciation more? That will lead you down a path. Also, how much do you realistically have to invest into real estate each year? That will lead you down a path. All these are important questions to ask before you jump into the world of real estate investing.
So get super crystal clear on your goals & budget, and then move onto the next step!
Step 2 - Define Your Property Selection Criteria 🗒️
What type of property are you looking for? In real estate investing this is referred to as your “buy box”. The buy box breaks down into 4 key elements.
Property Type: Do you want to buy a single family home or a multi-unit? Do you want a fixer upper or something more turnkey?
Location: Do you want to be close to downtown or do you want to be in the suburbs? Do you want to be in good school districts or does that not matter?
Price: If you put 20% down, how much can you afford? If you have $20K, for example, you’re shopping for $100K properties.
Financials: What type of returns are you looking for? How much monthly cash flow are you targeting?
Having a good sense of your “buy-box” is going to help narrow your search and help you stay focused in the process. Your criteria might evolve over time, and that’s ok, but don’t skip this step. At the end of the day, if you don’t know what you are looking for, you’re never going to find it.
Step 3 - Pick Your Target Market 🎯
Now that you have a sense of both your goals and your property criteria, it’s time to pick which market you want to invest in. The nice things about doing these steps first, is they’ll organically rule out certain markets that don’t align with your goals and criteria. For example, if your goal was to generate cash flow, you probably won’t be investing in San Francisco. If your looking for $200K properties, you’ll be focused on markets where those homes are available.
You want to pull together a list of 5 - 7 markets that you are interested in and write them all down. At that point, you want to research everything you can about the market. Is the population growing? What companies are located there? What are the drivers of the economy? What is the average rent? There are a lot of factors to consider when conducting market research.
Luckily, I have a free market analysis guide that will help facilitate that research and help you pick your market.
Step 4 - Find an Investor-Friendly Agent 👩💼
Now that you’ve picked your target market, it’s time to find an agent that you’re going to work with. This step is critical because your real estate agent is the most important person in this entire process. You’re most likely going to be investing out of state, so your agent is going to be the boots on the ground expert giving you the local knowledge you need to be successful in that market. You want to interview a few agents and get a good sense of who you can work with. You’ll also want to make sure they predominantly work with investors (vs. traditional home buyers) because the conversations are very different. A huge bonus if they are investors themselves. Bigger pockets has a great free service that helps you find investor friendly agents.
Step 5 - Get Pre-Approved with a Lender 🏦
One of the great things about real estate is that you can borrow the vast majority of the money (75% to 80%) from the bank to purchase the property. In order to borrow money, however, you need to get approval from a Lender which is what this stage is all about. The bank will effectively request a bunch of documents from you (tax returns, bank statements, paystubs, etc) and check things like your credit score to make a determination of how much they are willing to lend to you (if at all). This ultimately impacts the price of the property you are looking for. In terms of finding a lender, a good agent will have lenders that they work with. So I would start there.
Step 6 - Interview Property Managers 👨🔧
Now is a great time to start interviewing property managers. After the acquisition, your property manager is your most important team member. They will be managing the day to day of your property and interacting with your tenants. This service will cost you anywhere from 8% to 10% of your monthly collected rent, but this is well worth the cost. There are a lot of property managers out there, and they aren’t all very good at their jobs. I would lean most heavily on a referral from your real estate agent or other investors who are happy with their property managers.
Step 7 - Analyze Deals & Make Offers 📊
Now that you’re pre-approved, it’s time to go shopping for properties! At this stage, you’re agent is sending you deals and you’re analyzing those deals to make sure it cash flows. I’ve wrote an entire blog post on how to analyze a rental property, so I won’t repeat that here. I’ve also built a free rental property calculator that makes this step as easy as plugging in a few numbers. Once the numbers for a particular property hit your criteria, you’ll let your agent know that you want to make an offer!
Step 8 - Conduct Inspections & Due Diligence 🔍
One of your offers will eventually get accepted and you’ll finally be under contract. Congrats! At this stage, you’ll need to inspect the property and do your due diligence to make sure that this property is really a winner. Your agent will arrange for a professional home inspector to examine every nook and cranny of the house. After the inspection, you’ll get a very long report that is going to freak you out. Don’t worry. Every inspection report looks like this. You just have to make sure all the big stuff are ok. I’ve put together a free property inspection checklist to help you do just that. If you don’t like what find during the inspections, you have the option to back out without losing any money.
Step 9 - Officially Close 📝
You’re at the home stretch. Now it’s time to finally close! This is probably the most uneventful part of the whole process. You and the bank will wire all the money to the title company which is a bit nerve wracking. Then, a notary will come to your house and you’ll sign all the documents to make the purchase official. You’re now the proud new owner of an investment property!
Step 10 - Rent the Property 🔑
At this stage, your property manger will get the keys to your property from your real estate agent and they’ll work to get the property rented out right away. They’ll come in, conduct any repairs to get the property “rent ready” and they’ll start marketing it to prospective tenants. There isn’t much for you to do as the owner, but to oversee the process and to stay connected with your property manager to make sure things are moving along. Hopefully it doesn’t take too long to get the property listed and filled with a market rate tenant. Once you finally find a tenant, you’ll start collecting rent.
Your transformation to real estate investor is now complete! See, that wasn’t so bad. 😉
Wrap Up
While going through your first real estate investment can feel like a daunting process, it gets easier with each subsequent acquisition. I hope this post gave you a good overview of the entire process and gave you some confidence that you can absolutely do this. Real estate definitely will take some work, but the pursuit of financial freedom is worth it. I wish you tons of success as you progress through the process.
Stay committed to the journey, my friend. Your future self will thank you.
