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Buying Rental Property: A Step by Step Guide

by Brandon Turner on February 22, 2013 · 23 comments

  
Buying Rental Property

It may be common knowledge that buying rental property can be one of the most secure and fastest ways to build serious wealth – but the “how to” knowledge is not so common. The steps to buying rental property, however, are not that drastically different from buying your own home, with a few important differences. This article is going to explain step by step how to buy a rental property and begin your entrance into real estate investing.

Step One: Do Your Homework Before Buying Rental Property

Please – please don’t skip this step. As soon as you’ve made your decision that you want to buy rental property, it can be easy to start shopping for homes and picking out the paint colors. However, your first step begins long before ever stepping foot into a house.

Doing your homework ahead of time means researching:

  • What kind of investment property you want to buy
  • How much you can afford to pay
  • What kind of neighborhood you want to invest in
  • What the average rent is in your area
  • What kind of return on investment you hope to make.

Doing your homework can be difficult for one major reason: You don’t always know what questions to ask. Because of this, BiggerPockets recently created the free “Ultimate Beginner’s Guide to Real Estate Investing” which will help any new investor learn how to get started. This guide will help teach you the necessary questions to ask.

Step Two: Make a Plan and Develop Criteria

Once you’ve done your initial homework, you can begin making a plan and setting your criteria. I highly recommend you write down your plan and goals, and refer back to them often. If you are looking to buy a single family home for between $150,000 and $200,000 – it’s easy to get distracted by the home with the beautiful garden for $250,000. By stating your plan and your criteria, you can hold yourself accountable to your goals.

Step Three: Arrange Financing

One of the most common mistakes made by homebuyers is to start searching before arranging financing. However, this error has caused untold heartache when buyers find they can’t afford the dream home they’ve found. This same principle applies to buying rental properties. Before shopping for your new rental property, be sure to talk with a bank about how much you can afford to buy. There are numerous different paths to real estate financing so be sure to weigh all your financing options before making your choices.

Step Four: Begin Shopping For a Rental Property

Now comes the exciting part! There are a lot of great ways that you can get find rental property. Begin by looking online at your local MLS to see what’s available. There are several websites you can use to find the listings, such as:

Each of these sites search generally the same MLS listings, which all real estate agents have access to. However, these sites do not contain all the information needed (and sometimes do not even contain all the listings, either.) For this reason, it’s important to get in touch with a local real estate agent that you can trust to get you more information. An agent is generally only paid, by the seller, when you purchase the home – so for a home buyer, using an agent is typically free.

It’s often helpful to find an agent who specializes in working with investors, as they are more keenly aware of what makes a good rental property. Also – be sure to share your criteria (See step two above) for your rental property, and allow your agent to help you find the best properties that meet your qualifications.

Step Five: Make Your Offer

When you find a rental property you want to pursue, and have walked through it, your next step is to make your offer. To do this, your real estate agent will fill out the paperwork based on your requests and submit your offer to the selling agent. The selling agent will bring your offer to the seller, and negotiations will begin. For a great article on negotiations, check out How to Negotiate: 7 Real Estate Negotiation Tips.

Be sure to only spend the amount that makes the most sense to you. Determine how much cashflow you need to make and don’t let emotion override the numbers. Be willing to walk away and you’ll always hold the upper hand in the negotiations. If you can’t agree to a number that works for you – it’s not worth buying. Remember:

It’s better to have no deal than a bad deal. (Tweet This Quote!)

Also remember, price is not the only consideration. Depending on the popularity of the property and the strength of the deal, there are many other issues to include in your offer, including:

  • Closing date
  • Inspection contingency
  • Financing contingency
  • Seller financial concessions
  • and more

These items are all important to discuss and decide if you will include in your offer. Be sure to talk with your real estate agent about all the necessary parts of the offer. Once you have a signed agreement with the seller and have agreed upon all terms, you now have what is known as “Mutual Acceptance.”

Step Six: Due Diligence

You’ve finally agreed on a price and you have a closing date set. Now, it’s time to begin your “due diligence.” During this period (according to the dates specified in your offer) you will hire an inspector to perform an condition inspection on the property, looking for any defects that may cost you money in the future. If something is found, you can always go back and re-negotiate with the bank (as long as it is within your “inspection contingency” timeline, as specified in your offer.)

If you are buying in a “hot market” it may not be wise to nickel-and-dime the seller, or they may refuse to perform the steps and walk from the deal, giving it to someone else. On the other hand, it’s important that you don’t get stuck with a property that has major problems – so be sure to weigh the decisions carefully and keep your goals in mind at all times.

During this time between “mutual acceptance” and closing – you will also finalize the financial arrangements with your bank or other lender. This is also the time when the Title Company or Attorney, depending on your local customs, will take over facilitating the transaction. When the day of closing comes, you will sign documents and will be given keys to your new rental property.

Step Seven: Start Landlording

Finally, the deal has closed and you are now a landlord! If the property is vacant, you will need to learn how to rent your house (be sure check out How to Rent Your House: The Definitive Step by Step Guide” here on BiggerPockets. You will also need to brush up on your landlording skills, so be sure to check out “How to Be a Landlord: Top Ten Tips for Success” and ask questions, for free, anytime on the BiggerPockets forums. Also – don’t forget to check out the BiggerPockets Ultimate Guide to Tenant Screening to ensure you only rent to the best tenants!

Do you have any tips for buying a rental property? Or do you have any questions? Leave your comments below to discuss!

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{ 23 comments… read them below or add one }

jeffrey gordon February 22, 2013 at 3:56 pm

Thanks Brandon, you are earning your money these days, lots of great content coming out of BP this year!

I would really endorse getting hooked up with a investment property real estate agent with a good IDX on their website so you can get the most accurate and update to listings. Zillow/Truila etc. are proven to not be as accurate as the local MLS they are getting their listings from.

A VOW, if available, might be even better, but unfortunately Redfin is not in many markets for folks around the country.

j

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Brandon Turner February 22, 2013 at 10:42 pm

Haha thanks Jeffrey! I like all this writing and research I get to do. I didn’t realize Redfin didn’t go everywhere – but that makes sense. In Washington, it works well but I think it’s based here (maybe?) I have to admit I don’t know what a “VOW” is – can you elaborate?

But yeah – having a solid agent you can rely on for info is priceless.

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Alex Craig February 22, 2013 at 4:15 pm

I would highly recommend using an agent that has rental properties themselves. You would not hire a financial consultant that is not invested in the financial markets; real estate should be no different. Buying through someone who has rental properties will be able to point out key features in the house that could be maintenance nightmares that only a individual with rental properties would know.

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John McCombs February 22, 2013 at 10:08 pm

For my W2 job, I’m an elementary school principal, and when you wrote about homework, I naturally wanted to chime in. I believe that most new investors would look at that list, give these items a little thought, and proudly say that they did their homework- much like the students I see in my office. Instead of just “researching, ” I would recommend that new investors get a spreadsheet, like some I’ve on BP, and crunch the numbers on 20 real properties that they think meet their criteria. On each of these 20 practice properties, they should run the numbers as flips or buy-and-hold properties. This practice will help them know the difference between ARV, CF, NOI, and all of the other acronyms that represent formulas which are used to analyze deals. If they don’t do their homework, Brandon, send them to the principal’s office. Oh, and BTW Brandon, keep up the great writing- you’ve earned an “A.”

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Brandon Turner February 22, 2013 at 10:39 pm

Solid advice, John! I agree, I think running the numbers is so important. I think too many people fall back on the “I’m not good at math” line – but that makes it all the more important to learn it. And thanks for the “A” – where were you when I needed those in High School!?

By the way, hint for the day – you should hook up your email to a “Gravatar.com” profile, so your picture shows when you comment on certain blogs like this one! It takes like 30 seconds and will show up on any blog on the internet that uses wordpress. And it’s free. Can’t beat that!

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Chris February 25, 2013 at 11:31 am

Alex, respectfully I have a different view when it comes to realtors that own rentals. It’s just human nature to keep the better deals for yourself. If the property is not good enough for them to purchase, I usually find that is the same for me.

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Brandon Turner February 22, 2013 at 10:39 pm

I agree Alex, I think agents who have property of their own is super important, as is finding an accountant who has property. It just makes sense!

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Dennis February 23, 2013 at 12:12 pm

Just discover your blog! My wife and I have begun investing about 2 years ago and are thinking about adding rental properties. I noticed in your article you put the offer making before the due diligence. Would you want a good idea of the cost of rehabbing and repairs before making an offer or is it a better strategy to renegotiate with the seller once the cost of rehabbing is locked down? I can see the benefits of both.

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Brandon Turner February 23, 2013 at 9:47 pm

Thanks Dennis,

I love investing in rentals. Sure, it might take some more work, but the returns can be fabulous and there is just something about it that makes me feel good :) Be sure to check out the BiggerPockets Start Here page. This site is HUGE and easy to get lost in – but there are two main focuses: The Blog (which you found) and the Forums (which are VERY active, and great for live discussions all the time.) So jump on in and let us know how we can help you out!

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John February 24, 2013 at 6:01 pm

It’s OK to get your feet wet buying retail from and agent, but don’t forget finding FSBOs and advertising for buyers, as well as mailing to people in foreclosure. I’ve bought many of my dozens of rentals “subject to” (search it in the forums on this site) with between $10 and $5000 down, and a few have paid me to take their houses, I’ve also bought many on Contract for Deed at 0% interest. Though I’ve paid cash for many, I believe I’ve gotten better deals (and financing) buying that way, and it’s more fun. Plus with little of my own cash (or loan) in the deal, my returns have exceeded 1,000% in several cases, even just as cash flowing rentals. It doesn’t take much of a positive cash flow to make that return on an investment of $10, plus a few closing costs.

Yes, it’s harder to find those deals (and yes, decent sub2 deals are still around), but it’s worth it, since I’m usually the only buyer they’re talking. In exchange for a good price, good terms, or both I can offer a quick, no hassle, “as is” closing without Realtor delays, etc. Creative real estate is a big business and a great opportunity, which I recommend anyone serious about this business look into.

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Brandon Turner February 24, 2013 at 6:08 pm

Great advice! I kept this article pretty basic, so I appreciate the additional insight! There are a lot of really good places you can look for deals – above and beyond just the MLS.

Thanks for commenting!

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Michael February 24, 2013 at 6:53 pm

Good simple breakdown Brandon. Make a plan in step 2. Pretty basic but good to remind people as some may go into a deal without a plan and certainly don’t have a plan for when things may go wrong.

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Brandon Turner February 24, 2013 at 11:42 pm

Thanks Mike!

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Don Shore May 10, 2013 at 8:43 pm

I want to start investing in rentals in about a year. I’m waiting to get enough money saved up to buy outright or put a sizable down payment on my first rental. I was thinking of using a rental company due to the fact I will be out of state from the rental(s) and won’t have the time to deal with the problems that come up or to show the house. I will be working 70-100 hours a week in my new job, yes up to 100 hours a week, so you can see where my time crunch is from. That and the fact I want to buy in TX and will be working in ND. I hope to retire in 7 years or at least work only for myself.

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Brandon Turner May 10, 2013 at 9:59 pm

Awesome Don! Definitely plug into this community and we’ll help you get there. (I’ve heard crazy stories about working up there in ND. Great money – but easy to spend it all quickly!) Good luck!

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Dave May 14, 2013 at 7:02 pm

Hi Brandon,
I am buying a rented condo.
How can I make sure that I receive all the documents, security money, key’s deposit, and the last month rent from the seller?
Is there any time limit there that he deliver everything to me after closing or it should be at the time of closing?

Thanks for your advice.

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Brandon Turner May 15, 2013 at 8:50 am

Hey Dave,

Are you buying through a real estate agent or private party? Either way – the title/escrow company or attorney that you use should take care of this for you (I’d ask them though) if your Realtor doesn’t. But, it definitely should all be in your possession by the time you close – or don’t expect it at all!

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ThosMN May 15, 2013 at 8:13 am

Dave, You should require this info as part of your due diligence prior to closing, trust but verify. It’s not only common, it’s expected. I’d recommend looking at his past couple years’ Schedule E’s for the property, too. And if you can control the closing (and title company you use) all the better. If seller doesn’t want to use a title company, find one and agree to pay for it, so you can control that part, with their help, If seller won’t comply with your requests, that’s a big red flag.

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Al Williamson December 18, 2013 at 11:51 am

Nice overview. It’s tough to summarize all the steps in doing your homework. The steps could go on for pages. The neighborhood needs to match your personality type. Not everyone who can afford to invest in a low-income neighborhood should.

When you consider the fabric of the neighborhood, you’ll see that neighborhoods that consist of mostly renters, look for the landlords to advocate for it. If you don’t want to go the extra mile, the consider limiting yourself to middle class neighborhood and better.

Please, cause no harm while investing.

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Timothy Trewin June 29, 2014 at 7:59 pm

Brandon,

I know I am late to the show in regards to responding to this blog, but it is an excellent one and it truly gets myself and my wife excited about starting this endeavor once we get settled in Tennessee. We plan to be buy and hold investors, so this blog is just what we were looking for. Thank you for taking the time to write it.

Tim

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samuel August 11, 2014 at 4:18 am

thanx for this kind of blogs.it will help new user to get maximum benefit from it.

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Eric September 20, 2014 at 4:29 am

Nice article for new home buyers and the step by step guide is too good. Keep it up keep blogging..

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Mathew Gunkel September 28, 2014 at 6:55 pm

Thanks Brandon,

Very concise article with links for additional info. Perfect for a newbie like me. Thanks!

Mat

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