How To SUCCESSFULLY Buy Your First Rental Property in 2022 (6 Steps That Took Me From 0 - 20+ Units)Aug 12, 2022
Let's talk about real estate and how to buy your first rental property. I want to give you a step-by-step process of everything you need to know and everything that you need to do so that you can SUCCESSFULLY buy your first rental property in 2022 and beyond and start building that passive income…..
And eventually create financial freedom for yourself.
This is the same step-by-step process that I've gone through for the last 20 rental property and property flips I've completed.
You can watch the full youtube video below
STEP 1: SAVE FOR A DOWN PAYMENT
The very first thing that we have to do in order to buy a rental property is save for a down payment.
As a general rule of thumb you're going to need between 20%-30% for a down payment for your rental property.
NOTE: If it was your personal home you could do as little as 3.5%-5% down using an FHA loan or conventional loan.
Yes there are strategies that allow you to do no money down, land contracts, seller financing, etc, but those are more advanced loan techniques. For this we are sticking with the most common path of purchasing a rental property.
According to the federal reserve economic data the median price of a home sold in 2022 was about $428,000 so if we were to take that $428,000 and calculate 20% of that it would leave us with $86,000 down payment needed in order to buy your median home for a rental property in the united states.
$428,000 *0.20 = $86,000
Your area may be way more expensive, it may be less expensive, so be sure to go online and see what the typical cost is for a home that someone would rent out and take 20-30% of that to help you find your down payment requirement.
If you don’t have enough money for a down payment, I highly suggest you start working on cutting your budget and also finding ways of increasing your income so you can start saving
Be sure to check out some of my other videos and blogs “How To Budget Your Money The Right Way (And Retire In Less Than 10 Years)” and “ 9 Ways That Will Help You Save Money FAST (I Saved $9,000 in ONE YEAR On $19,000 Income)”
STEP 2: GET YOUR CREDIT SCORE UP
This brings us to our next step which is to get your credit score up. If you're like most people you're not going to be paying for this house in cash, which means that you're going to need to be able to qualify for a loan.
In order to do this you must have good credit.
Having good credit can help you maximize your profits and save you tons of money over the years due to having the lowest interest rates possible on a loan
According to Experian you should be aiming for at least a 620 credit score, however if you really want to maximize the loan benefits and get the lowest interest rates possible, you really should be aiming for at least a 740 credit score or higher.
Having good credit will save you tens of thousands if not hundreds of thousands of dollars during your lifetime.
Let's use this example for instance….
Let's say that we have two different people looking to get a $250,000 loan over the next 30 years
Person A has “ok” credit and is able to get a $250,000 loan at 5% interest for 30 years
Monthly Payment = $1,342 per month
Total Interest Paid = $233,000
Person B has great credit and gets a $250,000 loan at 4% interest for 30 years.
Monthly Payment = $1,149 per month
Total Interest Paid = $179,674
So that 1% difference in interest rate on a loan of $250,000 is a difference of almost $54,000
IF you are needing to get your credit score up I highly suggest you check out some of my other content on “8 Easy Ways To Improve Your Credit Score”
STEP 3: GET YOUR TAX RETURNS IN ORDER
This brings us to the next step of the equation which is getting your tax returns in order.
To qualify for a loan not only do you need good credit, but you must have a good history of income.
The whole point of showing your tax returns is to help lenders see that you have really good stable income and that you are more than likely able to pay the monthly payments on the property for the course of the loan.
Even though your tenants are going to be paying the mortgage, lenders want to make sure you can cover if need be.
Mortgage lenders prefer people who are W2 with steady paychecks or a salary.
They will want your last two years tax returns and take the average of those to determine your overall income.
If you are an independent contractor, self employed, or a freelance worker they will also want to see your last 2 years tax returns and may also require some other items to help them with their decision. That also means that if you do a lot of write offs you may want to stop doing that for a year or two to help get your income up.
The most common question that people ask at this point is “how much money do i need in order to qualify for a home loan?”
There is no exact amount of income needed to qualify for a loan, however we can use the 28/36 rule to give us a very general idea of whether or not you would have the possibility of qualifying for a loan.
Rental property should not exceed 28% of your gross income
Debt to income ratio should not exceed 36%
This rule doesn’t guarantee whether you will get a loan or not, there are many other variables.
It is a general rule to help you know if you have a chance at qualifying for a home loan.
NOTE: be sure to check out multiple lenders. Some lenders are more flexible and creative than others. I’ve had many lenders that have turned me down but other lenders gave me a loan.
The only way you will truly know if you will qualify for a home loan is to gather your materials and try to get pre qualified with a lender ahead of time.
Also keep in mind that a lender will use about 75% of your potential rents as income when looking to qualify you for a home loan.
STEP 4: LOOK FOR PROPERTIES AND ASSESS CASH FLOW
This brings us to our next step which is looking for rental properties and assessing cash flow.
What I learned very early on in my investing career is that just because you invest in real estate doesn't mean it's a good investment.
The single most important thing you can do when assessing a rental property is determining if it's going to cash flow or not.
Appreciation in real estate is phenomenal and always something to strive for, but it’s something you can’t control and can fluctuate a lot with the economy. What you can control and determine is cash flow.
When investing in real estate your primary focus should be finding a property that cash flows.
Appreciation is just icing on the cake.
What you need to be doing is going on to sites like realtor.com, zillow, etc and getting an idea of what property values are and assessing how much you can rent these properties for, expenses, and overall cash flow.
To really assess if a rental property is good or not you need to know…..
- what a competitive market price is
- how much you could rent the units for
- general expenses
- Property taxes and insurance
- Property management expenses
Assessing cash flow of a rental property is very simple math. You just need to know what to calculate and assess if you’ll be cash flow positive based on the purchase price
PRO TIP: make sure you look for what's called a wedge deal and a wedge deal.
A wedge deal is a property that you purchase for under market value due to it needing some work to be done. Repainting, new carpet, restain cabinets, etc.
By doing some minor cosmetic fix ups you can create massive equity and returns once the property is brought up to date.
Just make sure you avoid properties that need extensive renovation - bad roof, bad foundation, etc.
STEP 5: MAKE OFFERS ON PROPERTIES
This brings us to our next step which is to make offers on properties.
Now that you've been assessing rental properties and whether or not they cash flow positive, it’s time to put in offers on the properties you find that are good deals.
If you don’t have one already, you will definitely need a real estate agent for this.
When finding the right real estate agent make sure that you find one that has great experience or is with a good team if they are newer.
Ideally you want to find one that has worked with investors before (looking for rental properties is different than someone wanting to buy a home for themselves)
It’s also important that you feel comfortable and confident around that real estate agent and you feel they have our best interest at heart and not just trying to secure a commission from you.
Expect to put in anywhere from 5-10+ offers before you get one accepted. Real estate markets in 2022 are still very strong in many markets and there are many buyers looking to purchase.
PRO TIP: know your numbers and stick to them. Investing in real estate can get emotional when you are close to getting an offer accepted. Don’t get so excited that you offer way more than you should just because you are excited about buying a rental. Remember, no investment is better than a bad investment.
STEP 6: RENT OUT RENTAL PROPERTY
This brings us to the next step which is to rent out the rental property.
Once you have an offer accepted and you do any minor renovations needed, it’s time to get the place listed and rented out.
If there are already tenants in the place, then your job is just to take over day to day operations.
If the property you purchase is vacant, then you will need to put up a listing to find tenants.
There are a couple options when looking for tenants and managing a rental property:
Do it yourself
Hire a property management company
Find a real estate agent
While you keep the most amount of profit by doing it yourself, you will also be taking on more work. It is up to you to determine if you feel it’s worth managing, screening tenants, finding subcontractors, etc to keep your rental functioning well.
DOING YOUR OWN PROPERTY MANAGEMENT
Where to list your place for rent?
There are many websites that will allow you to list your rental property
- many more
Be sure to take the best photos possible and write up a description of the place including all relevant information
- Rent price
- Duration of lease
- Deposit requirements
- Do you accept pets?
- How much income should a tenant make?
When looking for a tenant it’s important that they have good income. The higher the income compared to the rent price the greater the likelihood they will be able to pay each month (doesn’t guarantee it though)
Ideally the tenant should make 3X monthly rent. This gives a good likelihood they will be able to cover rent. There is no rule though and you can require as much or as little as you want.
Going With A Property Management Company
If you are going to go with a property management company be sure to check out multiple ones in your area.
The key is to find one that has great reviews, has been around for a while, and charges a reasonable amount.
Expect to pay around 5-10% of your collected rents in management fees depending on your area and how competitive property management is.
The services they provide also varies greatly depending so be sure to ask what all they do for that fee - screen tenants, hire subcontractors, help with repairing issues, help with evictions, etc
That is how you buy your first rental property in 2022 and beyond.
If you are wanting more help with finances - ranging from buying your first property, saving money, learning to make more money, investing, or personal growth be sure to go to my website and check out some of my coaching programs and offerings
I am a peak performance coach who has worked with teens all the way up to CEOs and C Suite staff of fortune 500 companies. Helping people go from where they are to where they want to be in the areas that matter most to them: finances, fitness, business, relationships, etc
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