How to buy your first rental property
People new to real estate investing often have no idea where to start. I get a lot of questions from aspiring real estate investors as to how they should begin, and what they should be doing.
Getting started in real estate investing can be a daunting task. However, if you take the time to build a solid foundation of knowledge before you begin, you will be off to the races. If you follow the advice precisely in this article series, you will have all the information you need so that you can confidently buy your first rental property.
Before you start the process - Determine why you want to buy a rental property
This is extremely important. However, it is a step that is often overlooked by people because they do not perceive it as being an important.
Knowing why you are buying your first rental property, will help you to stay motivated and focused on this goal when times get tough for you.
In the world of real estate investing, times often get tough because owning and managing real estate is not easy. It takes time, effort, and organization on the investor’s end in order to successfully manage a portfolio of rental properties.
Also, people who do not have a clear sense of why they are buying their first rental property tend to get confused. If you don’t have a crystal clear vision of why you are doing it, it is easy to lose your focus and shift your attention towards another project. For instance, one day someone could be interested in real estate investment, the other day, they could be interested in stocks and the financial market. Although on the surface, this may sound okay, it is not. A lack of focus is never a good thing. You need to be focused like a laser.
Here are some clear examples of why an individual would invest in their first rental property.
An individual needs the extra monthly cash flow from the rental property.
With the cash flow, the individuals decides to pay down the mortgage on their principal residence. As such, they are able to dramatically reduce the time it takes for them to pay off their mortgage. Paying down their mortgage faster is an important goal for this individual. This is a strong why.
A young couple is trying to save money for their young child’s future education.
In order to save for this education, they decide that investing in real estate is the best game plan. They plan to buy a rental property, keep it for several years, and then sell it. They will use the equity from the sale of the property to pay for their child’s education. Making sure that the child has enough money for their future education is extremely important to them. Therefore, they are motivated in making sure that this plan works. This is a strong ‘why’.
Similar to example #1, here the individual requires cash in order to pay down their debt.
Instead of using the cash flow to pay down the individual’s mortgage on their principal residence, they use the monthly cash flow to pay down bad debt such as credit card and loan balances. Here the individual might be quite motivated and focused on paying down this debt, until eventually all of the debt is paid off. This is a strong ‘why’.
Now, here are some examples of situations where an individual does not have a strong ‘why’ as to why they are buying their first rental property.
They want to make a lot of money from their rental property.
Neil’s Commentary: “What exactly does this mean? This is a very vague goal. Vague goals are not good because they are impossible to measure. How much is ‘a lot of money?”. Goals need to be more measurable. In order to be a more specific goal, this individual should quantify how much money they want to make from their rental property. For instance, they should restate their goals as follows:
“I want to make a lot of money from my rental property as I will be holding the property for a minimum of 5 years. My expected equity appreciation over this time from is going to be $50,000. Once I have reached this equity appreciation target, I will sell the property.”
An individual wants to buy their first rental property and then they want to become a real estate investor full time.
This if often a lofty goal that is not achieved by many real estate investors due to lack of focus. Again, this is a very vague goal that is difficult to measure. In order for this goal to be more focused and more specific, numbers and time lines need to be stated.
For instance, this goal can be restated in the following manner:
“I want to buy my first rental property by the end of this month. The property will be cash flowing $500/month. I then plan on purchasing 6 properties a year over the next 5 years with joint venture partners, all of which will be cash flowing at least $500/month. ”
Buying your first rental property requires you to follow a step by step process. The more organized that you are on the front end the easier time that you will have with purchasing your first rental property.
Determining why you want to by rental property can never be skipped. You need to clearly understand why it is that you are purchasing your first rental property.
If you are a new real estate investor and you want to buy your first rental property, but you don’t have the money to do this yet. Consider a Joint Venture partner. It is a challenge to a lot of new investors but when you discover there are only 3 powerful ingredients that influence people to say “YES” to give you money for your deals, it’s not so hard anymore.