10 Steps to Buying and Profiting from Investment Real Estate
Investing in income property can be a long process and it can seem daunting to both new and old investors alike. It does not have to be that way if you work with the right people and take all of the necessary steps from beginning to end. Below we have outlined 10 steps to take that will get you through the investment phases (research, purchase, and management) smoothly. Take these steps and you will find yourself with a great property, extra cash flow, and the motivation to do it all over again.
Step 1: Analyze your purchase ability
First you have to figure out how much property you can afford to buy. Will you be buying all cash or financing the property? An all cash offer has its advantages as you may be able to offer a faster close to the seller. This may allow you to negotiate a better price or better terms. For those of us who will be financing the purchase, we must consider how much we have to put down as a down payment. The down payment amount will affect our total purchase price because depending on other factors (credit, other assets, property value) a lender may only be willing to lend up to a certain percentage of the purchase price.
If you are financing, you should get pre-approved for a mortgage before you begin shopping. This way you know how much you can afford and you have a pre-approval letter to submit with the offer.
Step 2: Analyze investment criteria
You should ask yourself these questions about your potential investment. What city or area do I want to invest in? What are the property trends in that area? What type of property am I going to invest in? Will it be single family homes, multi-family homes, condominiums, or commercial property? Am I looking for a property that is move-in ready or am I willing to make repairs and upgrades? What is the return on investment that I am looking for? Answering these questions will make you think about the investment before you hit the market. Answering these questions will allow you to narrow the search so you can find your ideal property without being overwhelmed by the entire market.
Step 3: Figure out how you will hold title
If you are going to be building a real estate investment portfolio, it may be beneficial for you to not hold the title in your personal name. There are many benefits to holding and buying property under a legal entity that you control. Some of them are tax benefits, legal protection, and increased financing ability for later purchases. You have to decide if you will hold the property as an individual, a corporation, a LLC, a partnership, or a trust. Each type of entity has pluses and minuses. If you decide to hold title under a legal entity it is always advisable to consult tax and legal professionals when making this decision.
Step 4: Start putting together your real estate team
Investment property ownership is not a one man sport. You will need professional help at some point and the sooner you find professionals that you can trust and that you like to work with the better. Some potential team members you may need are:
- Real Estate agent
- Mortgage Broker
- Property Manager
- General Contractor
- Handy Man
- Home Inspector (Electrical, Plumbing, Foundation, Heating, Roof)
- Termite Inspector
It may take you a while to find someone you like to fill these positions on your team so it is best to start searching right away.
Step 5: Gather potential properties
It is now time to do an initial search of properties and put together a list. This is where a Realtor can come in to search MLS listing and other sources. It doesn’t hurt to use an agent because as a buyer it cost you nothing and they may have access to information that you do not. You can also search, by yourself, at the same time by looking up internet sources and walking and driving around areas. Both you and your agent can take this time to gather information on the area about schools, crime, and other demographic information that is relevant.
Once you get an initial list of potential properties that fit your criteria, you should schedule a time to do a walkthrough of the properties to see them in person and get an initial sense of any repairs needed. This should narrow down your list even further.
Step 6: Perform a Cash-Flow analysis:
Now that you have narrowed it down to a few properties it is time to do a cash-flow analysis on the income properties to see if they will make you money. You will need to:
- Estimate potential rents based on the local rental market
- Estimate expenses
- Property Taxes
- Home owners Insurance
- Vacancy rate
- Debt Servicing (Mortgage payments)
- Property Management
Once you have an estimate of the income and expenses, you can calculate the annual and monthly net incomes. This will tell you which properties will be profitable investments. Then you compare the returns to your required return on investment to see which properties fit you criteria.
At this point it is also a good idea to get information on comparable sales to help decide the market price of the property and how much you are willing to offer.
Step 7: Check public records
Before you put in an offer on a property, you want to make sure there isn’t anything attached to the property that will mess up the transaction. The title company will do a title report once you open up escrow, but you might as well take a look beforehand. If you find a property with a lot of attachment, it may not be worth your time to open escrow.
For this you will need to go to the county recorder’s office and search the property. What you are looking for are liens, unpaid taxes, pending litigations, or anything else that may be a problem. Once you have the complete picture it is up to you to decide if you want to move forward.
Step 8: Put in an offer and open escrow
When you have found that property that fits all of your criteria it is time to put in an offer. This is when the type of sale will matter. REO property (foreclosed property owned by the bank), short sales, regular sales, and for sale by owner properties will all differ in what will be accepted.
Factors to consider in your offer are:
- Offer Price
- All Cash offer or Financed
- Earnest Deposit Amount
- Time to close
- Closing costs
- Any Contingencies
What the seller will be looking for will differ depending on the seller. For example: a bank may take a lower offer price if the offer is all cash and closes in a shorter time. A for sale by owner seller may only be looking for the highest price.
You want to write an offer that is attractive to the seller, but you still get everything that you want. Your offer should also include any contingencies that you deem necessary (see step 9).
Step 9: Schedule Inspections
You never want to go into a property blind so once an offer is accepted you want to get any inspections and appraisals completed. This is where it will come in handy to have your real estate team in place. Inspections that you may consider are a home inspection, a termite inspection, natural hazard and mold inspections, and a property appraisal.
Your offer should be contingent on these inspections and if anything comes back that isn’t to your liking you can stop the transaction or request repairs or compensation.
Once the contingencies are released you are ready to close escrow and take possession of your new income property.
Step 10: Property Management
Now that you own the property it is time to decide if you are going to manage it yourself or if you are going to hire a property manager. Property management can cost anywhere from 8%-10% of the gross rents collected. This can be a bargain if you plan on owning multiple income properties or if you do not have the time to manage the property yourself. If you do plan on using property management, the cost should already be included in your cash-flow analysis. What does a property manager do for their fee?
• Lease Property (Background and Credit Check on Applicants)
• Collect Rents
• Pay Expenses
• Complete Repairs
• Hold reserves in Trust
• Service Debt
• Maintain Property
• Deal with Tennant Requests
• Pay owner monthly Cash-Flow
We think income property is a great investment if done right. Following these steps will increase your odds of doing it right. They will make sure that you are thinking about each decision at the right time and they will make sure that you have a profitable piece a property at the end of the process.
Contact us for more information on income property, property management, or real estate in general.