With interest rates so low and the equity in your home so high you might be thinking about buying your first rental property. What does it mean and how do you do it?
Credit + Financials
The first thing you need to start with is your credit. If you haven’t had a chance to look at your credit record in awhile you might want to go to creditkarma.com to take a look. You don’t have to have a lender do it, just get a peek at it yourself! You can actually give that credit report to a potential lender when you are ready.
Let’s assume that your credit is good. You’ve got 740 – 760 score at minimum and you’ve got a down payment in the 15 to 20 percent range. Another big factor to consider is your tax returns so if you have been self-employed this gets a little bit tricky. There are several documents you will need to deliver to the potential lender so they can see if you’ve been aggressive with your write-offs which could possibly work against you. You might not show enough in your net in order to qualify for a loan so if you made $150,000 last year but you wrote off a thousand dollars this will be a problem when you go to get a home loan. You may want to consider starting to retool how aggressively you write things off.
Be sure you have everything you need to give to the lender so they can get a financial picture of where you’re at. Talk to your lender and find out what you actually qualify for before you go shopping because nothing sucks worse than going out and looking for a home and falling in love with that perfect rental property that you just know is going to be ideal for your investment portfolio then end up not being able to qualify for it. So make sure you get pre-approved first!
Getting Familiar With The Market
Shopping is the fun part! Starting with online shopping is the best way to get a really good picture in your mind. Getting that mental picture of how much house you can get for what you can afford! Obviously you are going to be looking at homes that are in your price range because you’ve already determined from how much the lender will give you. However, be sure to look at things that are not only in your price range but also about 15 to 20 percent higher than your price range so you can really get a picture of the values of homes and what’s included in them. Looking at homes slightly outside your price range will allow you to spot a good deal.
One of the key things you’re going to want to know is how much does the rent go for in a given neighborhood and the easiest way to find that out is to go to the usual places that all renters go such as Craigslist, Apartments.com, and Zillow.
Will It Produce Cash Flow?
Cash flow is what this whole thing is about so determining what your expenses are versus how much you can get in rent will help you figure out the cash flow.
Your expenses are going to be:
- Your mortgage payment (principal and interest)
- Property taxes
Once you have those numbers then you take your fair market rent number and you put it on top and you net it out. You definitely want to make sure you have this figured out so you know if you will be generating positive cash flow.
Turnkey Home Or Fixer?
Some of my clients wonder if they need to buy a home that’s already in turnkey condition? Absolutely not! Older homes that are in need of some TLC and a little updating can actually be a great find.
These homes are going to require more work on your part and you’re going to have to invest some money and maybe even roll up your sleeves to do a little work yourself. But don’t pass over those homes that look a little tired, have the chipped paint, or maybe need the hardwood floors refinished or have an older style kitchen. You don’t have to spend a ton of money, you don’t have to make it a model home, you just have to get it to the point where it’s going to be in the running with the rest of the surrounding neighborhoods.
Now you’re ready to start making offers on homes and the reason I say “offers on homes” is because you may need to make a lot of offers on a lot of homes in order to get an accepted offer on a property that nets out the numbers that make sense for you.
Be sure to approach buying an investment property dispassionately looking at the numbers rather than getting gushy over a sweet looking home. If the numbers don’t make sense, you gotta pass.
Let’s say you’ve got an accepted offer… Whoo hoo!!! Now you get to bring in your crew and start inspecting the place. At this point, you really have to dig deep and engage that dispassionate mindset if the home is going to need major repairs. If the owner isn’t going to cover the cost, then you’re going to need to look into it to make sure it still makes financial sense.
Now this is something I’m intimately familiar with in fact I was featured on the discovery channel flipping a house. It was quite an adventure because what I learned very quickly is that when you hire a construction crew you want to make sure to put performance clauses into your contract with your contractor. If they go past the date that they were supposed to have finished there have to be penalties. Make sure you look out for yourself in this process. They can do great work and when you find a great one they are worth their weight in gold but they can get very busy. You want to make sure there is an incentive for them to finish on time or else they will have penalties.
Closing costs are about one percent of the purchase price. That’s usually a pretty good rule of thumb.
Getting It Rented
It’s time to put it on the market and get it rented!
This is the moment you’ve been waiting for so you are going to want to get good pictures. Let me tell you when you have great pictures of your rental it is going to rent much faster and probably at the actual rent that you want to get, so basically what I’m saying here is HIRE A PRO to get your pictures.
Talk to your favorite Realtor from that area to help market it, or if you want to rent it on your own, here are some pro tips:
- Let the neighbors know about it
- Put the pro photos up on social media and Facebook Marketplace
- Consider advertising with Zillow type Real Estate platforms
Be sure to enlist a background check agency to run a full credit and criminal history report on each potential tenant. Consider joining the Apartment Owners Association for helpful resouces including legal council.
Congratulations! You are in your way to building legacy wealth for you and your loved ones!
If you want to know more about how to get your offer accepted, feel free to reach out!
Since 2004, I have been a Realtor® in Southern California.
Thank you for watching and sharing my videos and blogs! I love to help educate people.
I am blessed to live just 2 miles from the shore here in Long Beach. Favorite thing? Anything involving the arts; music, visual, filmmaking, you name it! If you want to talk to me about SoCal real estate feel free to email, text or call me. I hope we get to meet one day soon 🥰
Kelly Corsino REALTOR ® DRE# 01704102
Keller Williams Coastal Properties
6621 E. Pacific Coast Hwy 150 Long Beach CA 90803