If you’re looking to learn how to buy your first rental property, congratulations! Real estate investing is exciting and can be an excellent way to grow your passive income. In order to open the right doors and get you off on the right foot, however, there are some steps you can take to make the process easier and more profitable.
How to Buy Your First Rental Property the Right Way
If you think you know what you’re doing, or you’re simply excited to get started, you might be tempted to go out and buy the first property that looks and sounds great. While that certainly could be an option, it’s not the recipe for success. Rather, it opens you up to making mistakes with real estate investing, not something you want if you’re trying to increase your income or even achieve financial freedom through real estate investing.
Instead, we recommend following these 6 simple steps to buy your first rental property:
1. Identify the type of property you want. Your first rental property purchase should be in line with your specific goals as well as your own personality. For example, some people find joy in buying a single-family home that they can rent out to a nice family. Others are looking for higher cash flow potential like you might get from a duplex or multi-unit apartment building.
Evaluate the pros and cons of each property type and how they fit (or don’t fit) with your financial goals. Once you’ve made your choice, this will help to focus your efforts on properties that fit your objectives and will propel you in the right direction.
2. Invest in property that’s in your own backyard. Not sure where to start looking for your first rental property? Begin by identifying an area you like that’s near where you live. Then, check out the neighborhood and see what the real estate inventory looks like in that area. Pick an area you’re comfortable with and don’t be afraid to ask questions!
For example …
- What do people who live there like about living there?
- What do people who live there NOT like?
- Are there specific features that make this area more or less desirable than others?
- What are prospective tenants in this area looking for (i.e. proximity to jobs, a good school district, etc.)?
3. Get pre-approved for financing. By this step, you’ve decided what type of property you’d like and where you’d like it to be located. Now, it’s time to nail down exactly how much you can spend on your first rental property. Take a close look at your current income and expenses so you have a good idea what your financials look like. Then, talk to lenders to find out what financing options are available to you as a small business owner or individual looking to start investing in real estate.
4. Look for rental property with a positive cash flow. In order to create a solid wealth-building real estate portfolio, it’s important to buy the right properties. When you look at the options available to you, do your homework!
In order to be a good investment, your first rental property (and any others you choose to buy in the future) should be income-producing. That means that the total amount of rent you are paid by tenants should more than offset any related expenses, including your mortgage on the property and the management of it.
5. Hire a property management company. This step is crucial if you want to continue investing in real estate after you buy your first rental property. Once you’ve purchased your desired property, turn the everyday management of it over to a reputable property management company. They have the expertise and staff to deal with tenant issues that arise, leaving you free to work on your business, grow your income, and find other properties to purchase. Just be sure that you have factored the cost of a management company into your rental rates that tenants will pay.
6. Get a tenant (or more than one) and start making money! If you’ve done your due diligence and picked a desirable property in a desirable area, finding a tenant (or more than one if you have a multi-unit rental) won’t be difficult. Just be sure to properly vet your tenants so you’re attracting the right type of people to your rental property.
It’s a good idea to do things like:
- Check a prospective tenant’s rental history (how long they stay in one place can help you decide if this will be a long-term tenant)
- Evaluate a potential tenant’s credit score (this is often a good indicator of their ability to pay rent on time)
- Do a criminal background check
Build a Solid Real Estate Portfolio and Achieve Financial Freedom!
Now that you know the easiest way to buy your first rental property, simply repeat the process if you want to create a wealth-building real estate portfolio. And, if you’re interested in using real estate as a way to create true financial freedom, I invite you to work with me. I’ll show you the exact steps my wife and I took to go from owning $0 in real estate to $5 MILLION in real estate by the age of 30. If we did it, you can too!