Real Estate Investing Basics

8 Steps to Buying Your First Rental Property

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Imagine a world where you didn’t have to wake up early every day or drive to work or make some other company super wealthy. And then be forced to rely on government, Social Security, and maybe 50 years of retirement savings just to squeak by in the last few years of your life.

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What if you could have the opposite?

What if you could have time freedom—now or soon—financial freedom, more time to do the things that you want to do with the people that you love to do them with?

Now, that might sound amazing, right? It’s not. You can attain that—but it won’t be easy.

The truth is that life of freedom, it is possible. It is entirely possible. But it’s not going to happen by itself. You’re going to have to make some radical shifts in your life.

And I believe that one of—if not the—best ways that you can make that shift happen, to make that life happen, is through the power of rental property investing (aka buying rental properties).

In the video below and in this post, I’m going to share with you the step-by-step process for acquiring your very first rental property. But first, let me share four reasons about why rental properties are so amazing.

4 Reasons Why Rental Properties Are Amazing

Maybe I don’t even need to sell you on it, but listen up.

Reason #1: Cash Flow

First of all, when you buy the right property, you get profit every single month. We call that cash flow. So each property is kind of like this little oil well. They pump money out of the ground 24/7.

Now, if you get enough units—you know, two, three, five, 10, 20, whatever, if you get enough—you’ll get that freedom that you want.

Reason #2: Loan Paydown

Second, when you buy real estate, you get to use a loan, which means you don't need to have all the money up front to buy it. You can even do it for as low as $0 down.

But here’s the cool thing. Over time, that loan gets paid off by your tenants. So you might start by owing like $200,000. But in 15 or 20 or 30 years, that’s paid off to nothing, and your property is worth a ton.

calculate-financials

Reason #3: Appreciation

Third, over time, rental properties tend to appreciate in value, which means while the property is going up, you're paying off the mortgage.

Yes, there are occasional ups and downs and dips in the cycle, but over the long run, it’s generally always been an upward trajectory.

Reason #4: Tax Benefits

Fourth, there are a lot of amazing tax benefits to owning rentals. And I don't want to bore you with all the details right now, but trust me, it's really awesome. You can pay almost no taxes—sometimes no taxes on the money that you make from rentals—if you're smart.

Related: The Ultimate Guide to Real Estate Taxes & Deductions

Making 100 grand from rental property investing is a lot different than making $100,000 from a job. You keep a whole lot more.

So, how do you buy rental property then? How do you get started? How do you buy your first?

Well, let’s go through the steps right now.

How To Buy Your First Investment Property

Step 1: Determine Your Market

The first step is you’ve got to find out where you’re going to invest. There are a million places to invest in real estate around the world. But you need to pick one place.

It’s nice to find your first deal locally or at least within an hour or two. So dig into websites like Realtor.com or Zillow, and start looking around your area at different properties to see what prices look like. Kind of get a feel for where prices are higher and where they’re lower. And if possible, connect with other rental property owners in your area so you can see where they are buying.

Related: The Comprehensive Guide for Financing Your Very First Real Estate Deal

I mean, honestly, you don’t need to reinvent the wheel every time and try to find some mysterious new place. Find out what works and where it’s working, and do it there.

Now, where do you find those people? Well, how about BiggerPockets—the world’s largest real estate investing community with almost 2 million members?

By the way, if you find that prices are just too expensive in your market, you can always invest long distance. For example, I live here in Maui, Hawaii, but I invest in Florida, Ohio, Minnesota, Wisconsin, and Maine.

You know, it’s doable, but it requires some “special handling.” For help with this, don’t miss my friend David Greene’s book Long Distance Real Estate Investing. It is fantastic.

Once you have your location nailed down, you know where you’re going to invest, it’s time to…

Step 2: Get Pre-Approved for Financing

Figure out your financing.

Now, for your first deal, a bank or local lender is going to be a great way to get started financing your real estate deal.

They typically require 20% down (sometimes a bit more or less) for a rental property. But if you’re willing to live in the property at first for a year—like you buy a duplex, triplex, fourplex, whatever, and you live in one of the units—you can get it as low as 3% down. Even 0% if you’re qualified to get a VA loan or USDA loan.

So, talk with some local lenders and see what you can qualify for and what programs they have.

If you don’t have that much money or you’re flat broke completely, you may have to spend time instead networking with other real estate investors in your area. Then, you can potentially partner with them on your first deal. You bring the deal, and they bring the down payment. That’s a bit trickier than just putting your own money down though.

But in the words of Jim Rohn, “If you really want something, you’re going to find a way. If not, you’re going to find an excuse.”

Step 3: Become a Master at Analyzing Properties

So, now you’ve gotten preapproval (I hope) from a lender and you know where you’re going to buy. Should you just go do it?

Hold your horses, John Wayne. Before you start buying property, you’ve got to build up one more skill: learn how to analyze properties.

Look, knowing how to analyze a rental property is, I believe, the single greatest skill an investor can have. Thankfully, it’s not really that difficult. You can definitely do it. And BiggerPockets even has calculators on our website that let you run the numbers on a rental property in less than five minutes.

But the key to this is understanding the actual income a property could produce, which a local property manager would be able to tell you in a two-minute conversation.

Related: Rental Property Numbers So Easy You Can Calculate Them on a Napkin (With Real-Life Example!)

So, find a local property manager or company. Ask, “Hey, what is this property renting for?”

Then, get a clear picture on the expenses that you're going to have every single month. That can be a little bit tricky, but hopefully not for you. Asking the right questions to the property owner or to the real estate agent, once you start looking for deals and once those deals are on your desk, then you're going to get the answers you need.

What does the insurance cost? Call the insurance company, right? Water bills cost? Call the water department.

Look, when analyzing deals, I really look hard at two things:

  • Monthly cash flow: The dollars that I end up with in profit every single month. I want that to be a few hundred bucks minimum on a single-family house.
  • Cash-on-cash return: The return your money made in a year compared to how much you invested.

Say you invested $10 into an investment and you made $1 in profit that first year. That's 10%. Good job! Or if you invested $20,000 into a real estate deal, and you made $2 in cash flow and profit during year one, that's a 10% return in year one, or a 10% cash-on-cash return.

Now, it’s not a bad number to shoot for, that 10%. Maybe you’re going to be a little bit more or less, but it’s usually in that ballpark.

So now you’re a rock star at analyzing rentals. You’ve done a bunch, right? What comes next?

man on the coast searching house on a real estate application on his smartphone. All screen graphics are made up.

Step 4: Shop for Properties

At this point, you’ve got to start looking at properties and trying to determine, based on the numbers, what could actually work out.

For most people, especially when you're first starting out, I'd recommend working with a real estate agent. Find an agent, preferably one who understands the investment side of real estate, and then have them set you up with automatic emails for whatever kind of property that you're looking for in the area you're looking at. It's really that simple.

Go to an agent like, “Hey, I’m looking for duplexes in this town.”

They’ll say, “OK, here are all the duplexes.”

You can also spend a lot of time on sites like Realtor.com or Zillow, and you can see what’s currently for sale on those websites.

And there are other off-market ways to find deals, as well. But I don’t want to spend a whole lot of time talking about that here. Honestly, 99% of you can find your first deal with the help of a real estate agent.

Related: 27 Ways to Find Real Estate Deals

Step 5: Analyze a Lot of Deals

I know step three was on deal analysis. Why are we talking about it again?

Well, now we’re going to put the knowledge to use. You’re going to actually start analyzing potential properties—a lot of them. You’re going to get really good and comfortable with deal analysis.

You won’t always be awesome at first. So analyze a few deals every day until you get something that you think you might be able to make work.

Step 6: Make an Offer

And then step six, make your offer. Look, your real estate agent is going to help you with this. It's not that complicated.

But just know that in a competitive market, you do have to be quick and smart.

You’re going to also get rejected all the time. It’s OK. Real estate is a numbers game.

You know, I probably honestly have maybe one out of every 10, or one of every 20, offers we make that get accepted. But that’s OK, because I just make sure that I’m always offering on enough properties. I’m analyzing enough, I’m offering enough that over time, I do get deals.

And I always try to find ways to improve my offers, as well. What works better? You can include a letter with it. Can I be faster?

Eventually, I do get into negotiations with a seller and then from there hopefully get the property under contract.

When you do get your property under contract, you're going to have to pay what's called earnest money. Earnest money is usually around 1% of the purchase price.

So on a $100,000 property, it might be $1,000. And it’s basically your pledge. You’re saying, “Here’s this thousand-dollar promise that I’m not going to just walk away from this deal and screw you out of all the weeks of hassle and time.”

That money is typically refundable to you as long as you either buy the property or you back out for a legitimate reason. What would that be? Maybe you did an inspection and you found out there was a meth lab in the basement.

Related: What Investors Should Know About the Home Inspection Process

small white model of house on dark-stained wooden surface with magnifying glass enlarging portion of home

Step 7: Due Diligence

Due diligence is all the stuff you do between signing the contract. You’re under contract and then actually closing the deal.

The first step is to schedule an inspection on the property from a local property inspector. Your agent will have a good recommendation.

Their agent can also help you pick a title company, which will help do the closing (or an attorney). They can do all the paperwork there. So the agent will also help you with that.

And if you’re buying a property that already has tenants in it, make sure you verify that the rental amounts that they said they were getting are actually what they got. Verify all the income and verify the expenses.

Also, line up a property manager during this due diligence time if you don't want to manage it yourself. Get insurance on the property. And then finally, at the end of all that, you're going to sign documents, wire your down payment (the bank's going to wire their money in), and you're going to close on the property, which is pretty exciting.

But we’re not done. There’s one last step.

Step 8: Manage Efficiently, Effectively, and Profitably

Your journey isn’t over. The best deal in the world can still be destroyed and bankrupt you if you don’t manage the property correctly.

Maybe you’re planning to use a professional property manager, and they usually charge around 10% of the monthly rent for their ongoing fee. Probably they’re going to be wonderful. But keep in mind, it doesn’t completely let you off the hook.

Related: 20 Questions to Ask a Prospective Property Manager

You still have to find and vet a great manager, which can be difficult. There’s a lot of bad ones out there, and you’ve got to keep an eye on them ongoing. Because the truth is, nobody will ever care about your property the same level that you do. I don’t care what you’re paying them. They aren’t going to care like you care now.

On the other hand, you might self-manage. You might take care of the tenants yourself, which can be rewarding in its own way. You’re going to save a bunch of money doing that, too.

But managing tenants does require a bit of knowledge and systems and processes and knowing what you're doing. If you want to learn exactly how I manage my rentals, my wife and I wrote a book on the topic called The Book on Managing Rental Properties. Either way, learn how to do it if you’re going to do it.

Good luck!

Where are you on your real estate investing journey? What do you need help with?

Join the discussion below!

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Jesse Mancuso Property Manager from Charlotte, NC
    Replied 23 days ago
    Great information as always Brandon!
    Arturo Matamoros Property Manager from Orlando, FL
    Replied 19 days ago
    Great article and a great process for new investors looking to buy their first rental property :)
    Paul Herlihey
    Replied 14 days ago
    Great article with concise insights
    Nicole Vessells New to Real Estate
    Replied 13 days ago
    This is awesome information! Thanks Brandon