I had a good run in the stock market after the 2008 subprime mortgage crisis. This was a time when you could buy almost any stock and easily make money. I gained lots of false confidence during the following few years. This led to me deciding to dive in balls-deep, and learn to day-trade full-time. Long story short, I ended up losing $14,000, which was most of my gains from the years before (click here if you want to read the full story.)
After that, I gave up on day-trading and dabbled in more conservative investments. I knew real estate was generally less-risky than the stock market, but I didn’t think I could afford a house until I was at least middle-aged.
Luckily, after a bit of research, I learned I was wrong.
My savings were modest, and my income wasn’t steady enough to qualify for a mortgage, so I had to go a different route. My research made me realize I could buy a house outright, without a loan. When I first found houses I could afford, it was exhilarating! Even though my friends and family were weary about my idea, I showed them who was boss when I purchased my first rental house about a month later.
Along the way, I learned a lot through research and trial and error. I’ve decided to put together the guide below so you can streamline the home buying process, and hopefully avoid common mistakes and become profitable faster. Happy home buying!
1. Research
Location is incredibly important for all businesses, including investment properties. The first city I tried had lots of options that were in my price range, but they were just too far of a drive. Luckily I found an alternative city that was more conveniently located.
Take the time to learn about the area, know where you should buy and where you shouldn’t. It’s important that your tenants have a safe place to live, which I need to remind you is your responsibility as a landlord.
The second part of the research, apart from location, comes down price. I often use Zillow.com for my research, but there are other tools available as well. With Zillow, you can find previous sale prices of houses in the neighborhood to figure out if you’re getting a deal or not. This way you’ll be able to make sure you’ll profit in the future when you decide to sell.
2. Property Inspection & Future Repair Cost Estimation
Now that you know how much a comparable home can sell for in your area, you’ll need to start viewing homes to estimate how much work the investment property will require. Before buying my first house, I didn’t know anything about how much repairs would cost. Luckily, through reaching out to people around me, I was able to establish a pretty decent idea of what each major repair would run.
Repair costs change greatly based on location, so ask around in your prospective area. Feel free to call professionals for free quotes. Knowing your repair costs will allow you to estimate if you’ll be able to make money or not.
Costly Repairs
- Roof
- Foundation
- Plumbing
- Heating and cooling (furnace/air conditioning)
- Windows
- Siding
- Electrical
Minor Repairs
- Paint
- Flooring
- Other cosmetic issues
I recommend over estimating all of your expenses, that way you’ll account for unexpected costs that I guarantee are sure to arise. Also, remember to look for evidence of termites, mold, toxic contamination, etc, which can completely destroy a house’s value. Be sure you have hired a trusted home inspector. I wasted my time with an inspector who was very biased before finding one who was more level-headed.
In the end, I looked at around 20 homes before I made my decision. Don’t get emotionally attached to any property, or rush into a purchase. I would also recommend seeing several homes in one day so you don’t waste time. Be sure to take excellent photos and detailed notes of each property and what repairs are required so you don’t confused them later (I made this mistake, oops.)
Once you have inspected all the properties on your list, and decided what repairs are needed, you’ll be able to combine this with your other data to decide whether you can profit from purchasing or not.
3. Expect the Unexpected
I never would’ve imagined how many fees stack up after purchasing a house. When you hear someone is making a certain amount of rent per month, without prior knowledge, it’s easy to be overly-optimistic on profit forecasts. For example, if someone tells you they charge $1,000 per month for their rental property, it’s easy to overlook that they might be spending half of that or more on expenses.
Major Expenses
- Closing costs
- Government fees
- Utilities
- Insurance
- Property taxes
- Mortgage
Remember to budget in a cushion for other potential expenses that may arise. I’m really glad I did this, because within a week of buying my house, I ended up spending a few thousand dollars because the furnace broke which led to the house freezing and having to do major work on the plumbing system.
I was also happy I listened to my father who told me not to over extend myself financially. Always leave a decent amount of money in the bank so you still have money to live on. No need to add extra stress to your life because you’ve spread yourself too thin.
4. Proper Negotiation
Even though you may be excited about a house, don’t get emotionally attached, no matter how perfect it seems. Remember that the one who cares least in negotiation, has the most leverage. Remind yourself that this an investment, spending too much on the purchase price decimates profit margins.
It’s always better to offer a low price and then negotiate back up to a middle ground. This was the technique I used to get my first house for 32% off the sale price!
If an owner won’t move on the price and it’s too expensive, move on.
BONUS
5. Property Management
This has less to do with how to purchase a rental property and more on how to save money and time with tenants. For me, it’s pretty much impossible to manage a rental property from abroad. For this reason, I decided to hire a property management company. Management companies take the hassle out of a lot of the process, or they should.
The first big hassle would be doing a proper background check on an applicant. My management company informed me of their screening process and I was amazed at how thorough they are. Getting a deadbeat renter can absolutely destroy yearly profits. It doesn’t matter if they paid all of their rent, if they destroy something or you have to evict them, say goodbye to that year of profit.
Other major benefits of property managers include:
- Creates a barrier between the landlord and tenant so the landlord can’t be taken advantage of as easily
- The tenant cannot contact you directly and annoy you with the problems
- Management companies are often harder on the tenants than an individual, which leaves you less chance to lose money
After you’ve purchased your property, be sure to remember to immediately have the utilities changed over to the tenants name. Whether you are managing the property yourself or a property management company, be sure to understand the lease terms completely. If you don’t like part of the contract, change it.
Conclusion
I walked into this home buying process and knew absolutely nothing and after about 1.5 months, I bought my first rental property. Over weeks of constant research, I feel like I got a pretty good understanding of how the process worked but learned a lot from unexpected situations. Now I’m making another passive income and building the PIERREBLAKE real estate empire! I hope that my tips will help you save money and time when you purchase your first rental property!
Best of luck future landlords!
