Most people tend to think of rental properties when it comes to real estate investing. Everyone thinks if they can get a few properties and rent them out, they’ll bring in enough cashflow to be financially free. While this may be the case, it’s not quite that easy. There are a number of things that need to be taken into consideration in order to get started buying rental properties.
The first thing we need to ask ourselves is why rentals? There are a few reasons why rental properties may be a good investment.
The first and probably most thought of is cashflow. If the deal is structured properly, rentals are a great way to produce cashflow. Money coming in every month, that we are not having to “work” for. This means the rent you are receiving exceeds any bills or payments on the property, what is leftover is your cashflow. Let’s say after all the bills are paid, you’re only bringing in a profit of $200 a month. You might be thinking, well that’s not much. But now imagine you have 10 rental properties, all producing an additional $200 a month cashflow. That’s $2000 a month! Now we’re talking!!
We at Legacy always say, “Never buy a property based on appreciation.” This is because you cannot ever predict what the market will do. However, having a property appreciate is always a plus and is usually more common than not. Along with appreciation are the tax benefits of rental properties. Again, only if your business is structured correctly can there be several tax benefits to owning rentals where you pay little to nothing on the money coming in from those properties.
Another advantage of owning rental properties is they can help improve your credit and loan history. Your tenants are paying down your mortgage, paying off your credit card, or paying on the loan you received for the property. This not only allows you to add these properties to your portfolio, but you will now look much more qualified to any lender in the future.
Now that we’ve decided investing in rental properties is right for us, what’s our next step?
The first thing you need to do is decide how you are going to pay for it. You need to get pre-approved for a loan if you are going that route. Traditionally, most banks require 20% down on an investment property. Maybe you qualify for 0% down, like a VA loan. In some cases, you will need to have pre-approval before you are even shown the property. Maybe you are doing a joint venture and you need to get with your partner to establish financing. Whatever your situation may be, you need to have a game plan so that when you do find a property, you’re ready to take action.
The next thing you want to do is learn about your real estate market. While it is certainly not required to invest locally, it may make things easier for a novice investor. In any case, it’s imperative that you know the market you are in, or plan to be investing in. You need to be aware of the rental prices, location, neighborhoods, schools, neighbors, etc. Is this a market you would be looking in if you wanted to rent a home? What kind of tenants will this property attract?
So, you’ve done your research, and you’ve established how you are going to pay for the property. How do you know if you’re getting a good deal? When it comes to real estate investing, your money is made in the buy. Let me say that again, YOUR MONEY IS MADE IN THE BUY! Your ROI (Return on Investment) is directly affected by the purchase of that property. If you overpay for a property … you overpaid for a property. No matter how much you cashflow, or the property goes up in value, you have still overpaid.
To avoid this, thoroughly analyzing the deal is imperative before making an offer. Are there going to be rehab costs? What are the taxes and insurance payments? What’s the location like ... close to schools, downtown, run-down neighborhood? Have you run the comps? You can never learn too much about a property before you make an offer and there will always be a surprise…and usually not the good kind. Who is going to manage the property, and will there be any costs to you?
Now that you’ve done your due diligence, you are ready to make an offer. When it comes to investing, prepare to hear the word, “no.” If you never hear “no,” your offers are too high and you’re overpaying for properties. Remember, this is where we make our money. If you’ve done the work, you’ll know what a good offer is and while there is always room for negotiations, you also know when to move on.
If your offer is accepted, awesome! Now you need to be sure your contract has exit clauses as well as necessary items, like a home inspection and appraisal. If something were to happen, you need to be sure you have an exit strategy. If you’re working with a realtor or an attorney, they will more than likely set up the closing. This will be done at a title company, where they review all the documents and handle the transaction.
There are a lot of things to think about, but if you do your due diligence and are not afraid to hear the word “no,” you can start making offers. At Legacy, we can teach you in much more detail how to analyze a deal to be sure you are on the right path.
Big picture takeaway points
Self-reflection questions to think more about the content
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