My Seven Step Process For Buying a Rental Property

As an agent and an investor I am always looking for a good deal, either for myself or for my clients. There's a lot of information available on what a good deal looks like, though there is very little about what to do once you've found a great deal.

So my hope is that this post demystifies the process of buying a rental property. Each property can have a different strategy, and each state can have different requirements as far as things to inspect, though these seven steps are consistent with 95% of all investment property purchases.

You'll want to create your own checklist for feasibility and items to inspect based on the area you're investing in, though I hope this helps give you a bird's eye view of what to do and the steps to take!

Step 1: Find a Deal

A great deal could come from anywhere, another agent, a wholesaler, a property manager or off market seller.

Step 2: Run Preliminary Numbers

I use my property analysis calculator (All subscribers will receive the excel spreadsheet this week!) and I type in the purchase price, estimated repairs, estimated rents, vacancy rate, property taxes, insurance, estimated annual maintenance costs, and the financing details.

If the initial numbers do not exceed 15% then I pass and move on to the next property.

If it does exceed 15% then I move on to the next step in my evaluation process.

Your criteria can be totally different than mine, and that's fine. In really hot markets you'd be lucky to get an 8% cash on cash return, and for most people, that's better than what they can get elsewhere.

Note: I know it's really hard to estimate the maintenance budget and the rehab costs at this point. I try to do my best to come up with a quick number based on the small bit of information that I have at that moment. If its a newer property that is being advertised as turn key then I won't put much there. If it's older and there are no pictures and I'm told it needs work, then I may put $15k-20k initially depending on size.

Step 3: Feasibility Before Offer

The feasibility step has a few stages. Sometimes if the deal is good enough after step 2, and its a really hot deal, I'll just go ahead and write an offer. Other times I'll run a partial or full feasibility before the offer. All depends on the specific details of the deal.

• Step 1 - Ask the property manager to give me an idea on what rents would be based on the size and location.

I want to verify that what I am inputting for the rents is correct. Usually they will give you a range or a high or low. The best property managers will give you an 'as is' rental rate, and an 'after repair' rental rate. You'll want to rerun the analysis based on both and see what makes the most sense.

• Step 2 - Check the Trulia Crime Map. Sometimes a deal looks great until you type the address in the Trulia Crime map. I'm not so concerned about the colors, I focus my attention on the types of crimes in that area. Everything from domestic disputes/DUI's to drive by shootings or homicide will be listed. I stay away from areas that have a lot of robbery and violent crime such as shooting and homicide.

Every area will have some sort of crime related activity so be prepared for that...

• Step 3 - Get a feel for the neighborhood. Have the agent send videos. You want to make sure you're not the nicest home on the block and that the direct neighbors look okay. You're not looking for perfection, though anything that would scare a tenant away is something that should be taken seriously. If the neighbor right next to you has five broken down cars in the front yard, that is going to be an issue.
• Step 4 - Ask your agent if they would be comfortable spending the night at this property and not fear for themselves or their car getting broken into. Of course you're not asking them to actually do that, but if you hear a long pause or hesitation, you may want to think twice.

Step 4 - Write The Offer

There are hundreds of different ways to negotiate, and every agent and every area has a different way of doing things. I'll give you a few things that I do to protect myself in these situations:

• Make the offer contingent upon an inspection.
• If there are existing tenants, make sure there is a contingency for a lease review and that the seller is required to provide all maintenance records for the last year or two and a formal rent roll. You want to determine if you want to keep these tenants or not based on this information. Some tenants may still be in a lease, but you want to prepare yourself.
• If you are getting financing, make the offer contingent upon appraisal and your ability to get financing.
• It's usually part of the inspection, but be sure to include the buyer's ability to inspect the side sewer or septic.

Step 5 - Do The Inspections and Complete The Feasibility

Once the offer has been accepted, you'll want to hire a licensed home inspector to fully inspect all major systems of the home and issue a report. Every home will have something, I've even seen 20 page inspection reports on new construction!

The purpose of the inspection is to know what you are buying, and potentially use the report as leverage to get the seller to address some issues that were unknown when you wrote the offer. Each situation is different, however most sellers will either repair or issue a credit if a major issue was found. If they are not willing to remedy, then you will have the option of walking away, typically retaining your earnest money is all was done during the inspection period.

Side sewer scoping should be done on every property. Typically, the sewer district owns the sewer main in the street, and from the stub to your property to the house is the property owner's responsibility. It can be very costly if that side sewer is damaged or old and disintegrating.

During the inspection you'll also be receiving information on the tenants (if tenant occupied) and you want to make sure the rent roll shows that the tenants have been paying on time, and that the maintenance requests are reasonable. I recently walked away from a property that had a ton of maintenance requests on an older house.

You'll also want to get your property manager over to the house to verify their thoughts on rents. You may decide to keep the existing tenants but raise the rents if they are on month-to-month or you can ask the seller to send them a notice to vacate prior to closing (I've done this a lot) and then do some repairs and re-rent.

You can also have a contractor stop by at the inspection to get a scope of work and give bids on any repairs that are needed. This will give you an idea of what the actual cost will be able to use this to negotiate with the seller and for crunching the numbers.

Based on all of the findings from the inspection and lease information, you may need to renegotiate with the seller or ask for repairs.

While you are re-negotiating with the seller, you will want to crunch the numbers again and see if the property still makes sense. There are times when the numbers will change significantly and if the seller is not willing to re-negotiate then you'll want to walk away. Sure, you'll be out an inspection fee but that is better than buying a bad deal.

Step 6 - Appraisal

Once you are past the inspection phase and moving forward with the property, your lender will order the appraisal (if you're getting financing).

The appraiser may catch some things and require work orders before your loan can close. The types of things I've seen appraisers call are roofs, rotten siding, chipping paint, missing carbon monoxide detectors (might only be a Washington State requirement), exposed electrical wires, plumbing leaks, etc.

If a property is a good enough deal but needs a lot of work and you think it will not pass the appraisal, you could switch to a hard money loan and use the BRRR Strategy.

While you are waiting on the appraisal, you'll want to work on getting insurance on the property. The lender will need an insurance binder from your insurance agent in order to close.

Step 7 - Loan Documents & Closing

Once the appraisal is in then the lender (if you're getting financing) will underwrite your loan and once approved, work up closing docs. While you're waiting its a good idea to start scheduling contractors or sub contractors if you are doing any work to the property. If you wait until you close to schedule then there will be a lag time and you'll have a loss of rent and utility payments and a mortgage to pay.

So that's it.. this is the process for buying a rental property! Not that scary really, and as you can see there are many opportunities to walk away if the deal is not as it seems.