Single family homes can be a great investment!
But for most people, the process to buy a single family home is still too confusing.
That’s why today I decided to boil down the process for buying a single family home into seven distinct “vital steps.” Use this guide as a sort of “road map” for your future as you search for and buy your next single family home.
Let’s get to the seven vital steps to buying a single family rental home!
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1. Do Your Research
There are a LOT of single family homes out there.
According to Census Bureau: 133,957,180.
So, when you decide that you want to buy a single family rental house, you need to narrow down the options just a tad. This is why the first step is research.
Now, research includes two different categories:
- Education: Do you know what you are doing? If not, there are plenty of articles, podcasts, webinars, and books here on BiggerPockets that can help you with that.
- Location: Do you know exactly where you want to buy? This will dramatically help you narrow down the possible choices.
I wish I could simply tell you the best kind of single family rental house to buy — but I would be lying.
Because I don’t know you!
The perfect investment is one that helps you best accomplish your goals. (Tweet that!)
So what do you want? Start there and work backward.
- Maybe you want to buy just a few really nice houses in really nice areas, and wait for appreciation to double the value of those homes.
- Maybe you want to buy low-income housing and let all the cash flow allow you to quit your job.
- Maybe something in between.
The point is you need to do some research before you jump in. But assuming you’ve done that, or at least are doing it, let’s move on.
2. Get Real Estate Leads
Real estate investing is a funnel.
What I mean by that is this: There are a lot of possible properties you could buy, but you will narrow down the choices until you purchase just one.
This is a funnel — because it’s wide at the top, narrow at the bottom.
Therefore, the second step in buying single family homes is getting leads into your funnel. Because the more leads you get in, the more deals you’ll analyze, the more offers you’ll make, and the more houses you’ll buy. But we’ll get to those steps in a bit.
Right now, let’s focus on getting leads in.
Leads can come in from a variety of sources. For example, some of the most common ways of getting leads might be:
- The MLS: The MLS is a collection of all the homes currently for sale that have been “listed” by real estate agents. If you want to buy homes from the MLS, you’ll need a real estate agent to help (but don’t worry, the seller pays for your agent so it’s free for you!). You can also search some of the MLS by using online real estate portals like Realtor.com, Zillow.com, or Redfin.com, depending on your area.
- Craigslist: You can either search this online classifieds website for people posting homes for sale, or create your own add to attract private sellers.
- Direct Mail: Direct mail is the practice of sending large quantities of mail to a carefully defined group of people (such as landlords) asking to buy their home. Maybe only 1/1000 will sell you their home, but if you send 1,000 letters, then bingo!
- Driving for Dollars: Get in your car and drive around the neighborhoods you would like to invest in. Look for homes that appear vacant, and write down the address. When you get home, research through the County Assessor’s website to find the owner and send them a letter. This is driving for dollars.
It doesn’t really matter how you get leads, but you’ll need them. If you are just getting started, I’d recommend beginning by finding a good local real estate agent to send you listings that match your criteria. If you are looking for three-bedroom homes that are listed under $200,000, have your agent set you up with automatic alerts about properties that meet this description.
Once you have leads coming in, it’s time to figure out what to do with them. So let’s get nerdy!
3. Run the Numbers
The third step in the process is analyzing the numbers. This means you’ll need to decide if it’s a good enough investment to help you accomplish your goals.
For this, we want to see what the monthly cash flow (and return on investment) will be for the property.
Cash flow is the profit you make each month or year, after ALL the expenses have been paid. While this may seem to be a simple number, it’s not always easy to determine.
For example, let’s say that your single family rental house is rented for $2,000 per month.
And let’s say the mortgage, with taxes and insurance, is $1,500 per month.
How much cash flow are you receiving?
You might be tempted to say $500 — but you would be WRONG.
Because there are a lot more expenses to be aware of than simply the mortgage, taxes, and insurance.
When analyzing for cash flow, you’ll also want to be sure to include:
- Mortgage principal
- Mortgage interest
- Flood insurance (if needed)
- Capital expenditures
- HOA fees (if needed)
- Snow removal
- Lawn care
- Property management
Of course, one of the beautiful things about investing in single family properties is that the tenant is oftentimes responsible for many of these expenses (depending on what’s normal for your area).
For example, in my area, the tenant is generally responsible for water, sewer, garbage, electricity, lawn care, and natural gas. However, I’ll still need to account for the rest of the expenses.
Of course, you can run the numbers using a spreadsheet — just be sure that your spreadsheet contains all of the possible income and expenses with the property.
If you’d like a faster way to do it, do what I do and use the BiggerPockets Rental Property Calculator, which can help you run the numbers on a potential deal in under five minutes.
This Rental Property Calculator also gives you the ability to print or share a PDF report with lenders, partners, your spouse, or whomever else you want to show the strength of a deal.
If you want to learn more about analyzing rental properties, be sure to read my article “The Ultimate Guide to Analyzing Rental Properties.”
Once you’ve fully analyzed the deal, you know the price that you want to pay for the property, and you are ready to move forward on a deal, it’s time to make an offer.
4. Make the Offer and Negotiate
Remember the funnel we talked about earlier?
(The more leads you get, the more deals you can analyze, the more offers you’ll make, the more homes you’ll buy!)
Well, it’s time to continue in the funnel and make an offer.
After all, you’ll never hear “yes” without the request!
Making an offer can be scary at first, but trust me — it get’s easier every time. I make offers all the time now and rarely think more than a few minutes about it.
It’s just part of doing business.
Now, how you make your offer is going to depend on how you found the property.
Let me explain. If you found the property on the MLS through your real estate agent, to make an offer, you’ll simply submit an offer with the help of your agent.
However, if you found the lead directly through the private seller without an agent, you likely will not use an agent to help you. Instead, you’ll make the offer directly to them, probably verbally at first. To get more official, you’ll eventually put all the terms of the offer on a Purchase and Sale Agreement, which you can likely pick up for free at a local Title and Escrow company.
Chances are your offer is not going to be accepted right away. You’ll need to do some negotiation. Now, don’t get scared — negotiation actually isn’t too hard. Just know what you want, know what they want, and try to find a compromise where everyone gets what they want!
For more on negotiation, read “How to Negotiate: 7 Real Estate Negotiation Tips.”
5. Get Your Financing in Order
I’ve got some bad news for you:
No one is going to give you a property for free.
Sorry, but you’ll have to pay for it!
Of course, you already knew that. But so many investors start trying to buy property without any clear idea of how they are going to actually pay for it. Maybe you’ve heard the phrase before, “If you find a great deal, the money will find you.” While this is true in spirit, it’s not true in actuality. You still need to get the funds!
Although this tip is listed as number five on this list of “vital steps to buy a single family rental house,” I would recommend that you begin your search for financing immediately, probably during step #1.
You don’t want to start making offers without at least a good indication of how you’ll be paying for the property you are offering on!
When buying a single family home as a rental property, you have a lot of financing options:
- You could pay cash.
- You could use a conventional loan, typically 20% down, from a local bank.
- You could get creative, using some of the techniques talked about in The Book on Investing in Real Estate with No (and Low) Money Down, such as lease options, HELOCs, or partnerships.
- Or you could buy it with a short-term method (like private money, cash, etc.) and later refinance it into a long-term, conventional mortgage (a tactic I call the “BRRRR” method — buy, rehab, rent, refinance, repeat!).
The way you finance your single family home will largely depend on your goals.
- Are you looking to maximize your cash flow? Paying all cash for the property could be right for you.
- Are you looking to use a loan but pay it off quickly? Perhaps a 15-year mortgage will be ideal.
- Looking to gain good cash flow and a high return-on-investment? A 30-year fixed mortgage might be just perfect.
- Looking to hold for just a couple years and then sell? Perhaps a portfolio loan from a small, local bank, credit union, or private lender would be best.
I would encourage you to look into several financing options to determine the best avenue for you to take based on your goals and the capital you currently have to use as a down payment.
To learn more about the loans options you have, be sure to read “Investment Property Loans: The Ultimate Guide.”
6. Close on the Single Family House
Finally, the last step in the process is to buy the property.
Seems easy right? It can be — but it can also be a maze to navigate through!
As a real estate investor, it will be your job to get the deal closed no matter what it takes. Sometimes you’ll just need to show up with a check in hand, and other times you’ll be driving all around the countryside trying to get signatures from some long-lost uncle who has a lien on the property! (Don’t worry — that’s rare!)
The point is closing on a deal is all about problem solving and getting to the finish line.
And you can do it!
You aren’t done yet.
7. Manage Correctly
The final vital step in investing in single family rental houses is to manage the property correctly.
After all, steps one through six make no difference if you don’t do number seven.
Now, you may or may not choose to manage yourself.
- Perhaps you want to hire a professional property manager to take care of everything;
- Or maybe you want to hire a real estate agent to find you a tenant, but you’ll do the management after that point;
- Or maybe you’ll choose to manage 100 percent.
There is no “right or wrong” choice here, but there is likely a “best for you” choice. Look at the time you have available and the skills you have. Will you manage the property effectively? Will you learn to say “no” when you need to? Will you be firm but fair? These are all traits a good manager should have, so if you don’t feel you can do them, hire someone who will!
Finally, keep in mind, just because you hire a property manager, doesn’t mean you have no work to do.
Because to be honest, most property managers kind of suck.
You’ll need to stay on them to ensure they are doing their job correctly. If not, they may end up charging you $1,500 for a contractor to put two screws in a wall.
Of course, if you are interested in learning more about managing correctly, pick up a copy of The Book on Managing Rental Properties, here on BiggerPockets!
Single family homes can truly be a fantastic investment.
They can provide stable cash flow and ample appreciation, and they help you build incredible wealth for you and your family.
It’s my hope that this article has helped bridge any gap in your knowledge on buying your next rental house. If you have further questions, please don’t hesitate to ask below in the comment section, or post your question over in the BiggerPockets Forums, where tens of thousands of active investors interact and help one another become more successful.
And of course, finally, if you are interested in using rental properties to build wealth through rental houses, don’t miss this week’s webinar!