Hey guys, it’s Sharon from digital nomad quest. And today we’re gonna go over how to buy your first rental property. So I get a lot of messages asking me how to buy your first rental property. And it’s because I talk a lot about it on my tic tock, my Instagram. So I get a lot of these DMS. And that’s why I wanted to go over this today. Because real estate can be a great wealth builder, it is said that 90% of millionaires actually invest in real estate. So if you’re looking to build a portfolio of rental properties, I’m going to do this macro view of how to buy your first rental property. And we’re not going to be talking about flipping or other investing strategies, we’re just going to talk about buy and hold investing. And we’re going to go over everything from the preparation process to analyzing markets and deals to building your dream team putting in your offer and closing.

So without further ado, let’s go over the 15 steps I basically outlined here.

So number one, you want to make sure you save money first, you know first off, you’re probably not going to be paying for properties all cash, you’re probably going to get a loan and most conventional loans require a 20% down payment. And they also have closing costs. And not only that, you’ll also want to save up cash reserves in case anything goes wrong. Now to wind down payments are usually 20%. And then for multifamily properties, it’s usually 25%. And this is the scenario for a conventional loan. However, there are other types of loans you may want to try. For example, if you got an FHA loan, it requires a 3.5% down payment.

And if you’re a veteran, for example, you could get a VA loan which is zero down, there are different requirements for these different loans. So we’re mainly going to talk about the conventional loan for now, if you are looking for those different types of loans, go ahead and speak with a lender and see if you qualify. And not only are there these different types of loans, there’s a lot of creative financing options that we’re not going to get into in this video because that’s a little bit more advanced. So if you’re just trying to get your first rental property, the conventional loan is probably the way to go when it comes to closing costs is usually about 2% of the purchase price. And then you’ll want to estimate about six months of expenses in case things go wrong.

And when I talk about six months of expenses, I’m talking about principal interest taxes and insurance. You know, there are situations where you’re going to have to deal with repairs, you may have to deal with vacancies, if the tenant ends up leaving, so you want to make sure you have cash in case of anything. For example, if that property were unoccupied for six months, you want to make sure that you’re able to pay that mortgage off in the other expenses in case that happens now going to number two, you want to make sure your debt to income ratios. Okay, so usually that means a max of 43%. Your debt to income ratio is basically your monthly debt payments divided by your monthly gross income so that 43% is the maximum you should have usually for borrower to get alone. The reason for that 43% Is that lenders want to feel safe lending to you, they don’t want to worry about the ability for you to pay back the loan. So they want to make sure you have enough income that you can pay off these monthly payments. That’s why it’s a good idea to save money to reduce your debt, especially the debt with high interest.

And if you can increase your income as much as you can. Number three, you want to have at least two years of w two job income proof this is another piece of criteria that lenders like to look at to make sure that you can actually pay off the loan. And then going into number four is you want to build your credit score. If you’re going to purchase with a loan, you want to have a 620 credit score at least and you’re going to get the best rates usually at 740 or more. But there are other loans like FHA loans that have exceptions. For example, with FHA loans, they require a 580 credit score instead and only need a 3.5% down payment with that credit score. But again, let’s stick with the conventional loan.

Now in order to build your credit score, you want to have a long credit history, you should have different types of credit, and you want to make sure you don’t miss payments, because if you miss payments, it can dramatically hurt your credit score, and they’re going to give you higher interest rates. So it’s going to be harder and harder to pay that back. So you want to make sure that you pay off your high interest debt as quickly as possible. And again, banks may not lend to you if you don’t meet that credit score requirement. And also if you have a lower credit score, they’re going to charge you higher interest rates on the mortgage that you’re going to pay. You want to make sure that interest rate is as low as possible so that you can make smaller monthly payments.

Number five, you want to make sure you learn as much as you can. So that means reading books, listening to podcasts and taking courses if you need to. Now some books I recommend our rich dad poor dad the ABCs of real estate investing, investing in duplexes, triplexes and quads and I really like the bigger pockets book collection. So right now some of the books I’m currently reading are the book on advanced tax strategies, raising private capital and the book on investing in real estate with no and low money down and all three of those are actually bigger pockets books even if you feel like you know a lot and never hurts to read more books.

These real estate books are actually really good and can teach you a lot and if you really want that step by step you guys should check out our course remote rental riches, which is really if you want that hand holding if you want to see our case studies you want to watch us call to build our teams. That course is a great one too. Get that hand holding and a lot of our students are actually buying their first rental properties really happy with the course. So if you guys do want to check it out, I’m gonna link it down below number six, you definitely want to start networking. So if you can go to meetups, you can even go to virtual meetup.

If you go to meetup.com. They’re usually a bunch of them in your area. And even if you don’t have any, you can be the first one to start it in your local area. The more you meet agents, investors, wholesalers, contractors, the more you can create those partnerships, get more deals and invest in more real estate, you can also learn a lot just speaking with other people. And sometimes these meetups have speakers that can teach a lesson. But you can also network with investors who you feel like you’re doing what you want to do, and you know, ask to buy them coffee and pick their brain possibly, and you want to make sure you provide value. So for example, my husband Sean, actually, he used to volunteer at meetups for a whole year. So he would be the one signing people in at every meetup so that he can meet those investors at each meetup and provide value when you provide value other people will want to provide value back to you some things you might learn at those meetups is you might find out what target market people are investing in. And you might want to get into those markets as well. You might get referrals for agents and stuff like that, or contractors, not all investors are going to be willing to give away their contacts. But it might be a possibility if you provide value to them. And if you meet the right agent, they may be able to pass deals to you that you end up investing in.

So a lot of my deals are actually from investors and wholesalers that I’ve connected with, they’ll send me a deal. And if I’m interested, I’ll put an offer and hopefully get it and get a cash flowing rental property. So real estate is all about connections. And you want to make sure you start networking as much as you can. Number seven, you’re going to want to do market research for your target market. You want to research cities you’re interested in based off of job growth, population growth, lower crime rates, income growth, and median home price growth. There’s a lot of different factors that you could be looking into. But these are some of the main factors that may help you with your decision. And you can look on sites like city data.com, or Department of numbers. And these are going to help you figure out if it makes sense to invest in the area that you’re investing in. The reason why you want to look for these factors is you want to make sure there’s demand to live in the city that you are investing in. You don’t want a city that is decreasing and population because it means people are leaving the city is probably going to go down in home value if that’s the case. But if more and more people are flocking to the area, for example, Austin is a booming market right now people are investing in it crazy. That’s why the home prices are going up and up. Number eight, you want to practice analyzing deals in your target market. So after you’ve picked your market, you want to understand what’s going to cashflow and what isn’t it is very dangerous to purchase a rental property that’s actually negatively cashflow.

And we’re gonna call them alligator properties. These are ones where you’re losing money every single month and it’s harder and harder to hold on to them. If you’re holding on to a property where if you are negative cash flowing and the property is losing value, that’s not a good scenario to be in if you are holding on to one hoping that will appreciate it is still kind of a gamble. So I like to look for properties that will cashflow first and then also look for properties in the right markets where I believe it’s going to appreciate in value as well could potentially just be stagnant in their home price because you’re not investing in a market that has appreciation potential appreciation is a huge wealth builders. So you definitely want to look into that on top of the cashflow.

Now when I say cashflow, I mean the rental income will not only make up for the mortgage payments, the property taxes the homeowners insurance, the property management fees, possible HOA possible future vacancies and repairs, which I usually a lot 10% for a cash reserve. So it’s going to make up for those expenses as well as profit. So there’s a lot of different expenses to account for. But if you’re able to cash flow, it can be an amazing thing. And you can possibly boost rents in the future and make more and more cash flow while the property is appreciating. And not only is their cash flow, you would be paying down your debt every single month you are getting a loan. There’s a lot of other different benefits like tax benefits, again, appreciation, but we won’t go into all that right now. But basically, you do want to analyze your deals. And if you want to learn how to analyze your deals, go ahead and check out my video on how to analyze a buy and hold around property. This is a very crucial step. So don’t skip it.

Number nine, you want to find a good agent to work with one of the best places is bigger pockets because they are all investor friendly. So if you find an agent in your area that actually works with investors, they will usually know what you’re looking for. You can ask the agent about the market and about the different neighborhoods which one’s better and which ones aren’t as good and you can ask about the different home prices and market rents number 10. You also want to contact multiple property managers. Now this is not a requirement if you’re investing locally. But if you are investing remotely, you will probably want to get a property manager who can handle tenant issues. I personally actually have a real property about an hour away from me but I still actually hire a property manager for that property because I don’t want to deal with tenant issues.

I feel like these companies can handle tenant issues a lot better than I can in screen tenants. A lot better than I can they know the average market rents, they know how to handle things. They know how to make a property rent ready. So some things you might want to ask them is what are the average market rents in the area, what their tenant screening and eviction process is some neighborhood information and maybe their fees and their processes. To me, property managers make the investments a lot more passive, so I don’t have to handle too much. Now pm fees can be about eight to 10%, it can be lower, I have a property where I only pay 6%. But it’s because it’s in a market that’s a lot more expensive, so they charge a bit less.

Also, if you have multiple properties with one property management company, there are times you can negotiate the fees lower as you build up your portfolio. So for example, I have one that it was 10% before and now it’s at nine and we can probably get that down to eight in the future number 11. You want to pre qualify with the lender, a pre approval letter from a lender basically shows that you are able to get a loan from this lender that shows that you are a serious buyer and you would be able to pay for the house that you would want to put an offer on so get your pre approval letter first before you start making offers so that your agent can use that and presented along with your offer. In order to do this, you’re going to want to call a bunch of different lenders and see what their rates are and see if you can get that pre approval letter.

But if you want to shop around for rates later, that’s still okay, so you can get that pre approval letter first. And then when you get an offer accepted, you can still try to look for better rates in the future number 12. You want to find a good deal. So agents are probably going to pass on deals to you as your work with them that fit your different criteria or you can look on the MLS, you can look on Redfin and just keep analyzing deals, keep using the spreadsheet, see if properties can cash flow, before you start putting the offer, you want to make sure you’re finding a good deal that can actually make you profit on top of the expenses. And not only through these different methods are so many other ways to actually find deals like I’ve actually gotten properties through bigger pockets through Facebook groups through wholesalers. So there’s a lot of different ways you can actually find deals, I would say sometimes it’s good to get sort of a fixer in order to get a better deal. Because basically fixing a property will increase the home value, getting something that requires a little bit of cosmetic repair, maybe at five to $10,000 can up the price of your home significantly.

So one strategy a lot of investors use is they want to find like the ugliest house in a good location because they know that they can fix it up and then sell it or rent it out for a lot more. But if you’re just starting out, maybe you’re too scared of getting a fixer, that’s totally fine, you might want to get a turnkey property, which essentially will start cash flowing right away, it might not be the best idea to get something that is completely messed up. For example, we have this moldy House Project that required basically an entire renovation required mold remediation for the entire house. And that’s something that would totally scare a beginner and it might be too much for a beginner to handle. So make sure your first investment is something you can handle, I do recommend not doing anything too crazy as a beginner because if things go wrong, which can totally happen, it might discourage you from investing in more and more properties. So I do recommend for beginners not to do anything too crazy and make sure it’s something you can handle number 13, you’re going to have to put in offers. And when you’re doing this, you need to have a lot of patience, especially in really competitive markets. For example, in the Bay Area, it’s so expensive, you’re probably competing against tons of people who are trying to buy the property that you’re trying to invest in.

While other properties might not be as in demand, maybe it’s not as popular amongst investors. Or maybe it’s kind of a secret where people don’t know about that market too much yet. And it might be a lot easier to win an offer there versus somewhere else. But again, this requires patience, make sure that you understand that not all of your offers are going to get accepted. And don’t just settle for something that’s mediocre, you have to make sure it fits your buying criteria. So if you have analyzed deals, you know what’s going to cash flow, but you can’t seem to get that property that cash flows, don’t just decide, Oh, I’m gonna buy this property that might not cashflow as much or it’s not going to do that well because you’re just having trouble winning offer so don’t settle for less. Make sure that the property fits your buying criteria.

Again, keep working with your agent who’s supposed to be sending you good deals over and over again and hopefully you’re going to win something number 14 Once you win that offer, you’re going to sign documents and close escrow there’s different moving parts in escrow usually takes about a 30 day period. And basically being an escrow is that period after your offer gets accepted to the day you get the keys of the house. between that time there’s a lot of things you’ll need to do, you’ll usually put in that EMD which is the earnest money deposit. It’s a good faith deposit that shows you’re serious about buying the property. It’s kind of like a deposit for the property by and it’s usually around 3% of the property. Now you might have an inspection period where you’re gonna hire a home inspector if you want to which I do recommend to get a home inspection report. That way you can see if there’s any big issues and you want to back out of the offer and for example, if you have a home inspection contingency, you might be able to negotiate with the seller to get home issues fix that were outlined in the home inspection report, or you might be able to back out of the offer and get your earnest money deposit back. And then also during this period of probably want to get homeowners insurance, you also want to find the property management company that you’re going to work with.

And lastly, you’re gonna provide a bunch of documents for the lender that includes like your tax returns your W two, essentially your proof of income and assets that show that you can pay off the loan. So after escrow you’ve closed on your first rental property, and it brings us to number 15. You want to work with a property management company to make the property rent ready. And again, it is optional to work with a property management company. But again, if you are investing remotely, you’re gonna probably have to do that because you want someone local that can manage the property. I love working with Pam companies, because they can totally handle the Make ready portion, the screening of tenants. But if you don’t have a property management company, you’re going to be the one to start doing that for your property. I talk a lot about out of state investing, which is why talk about PMW companies all the time, but even the one local like I mentioned, I still have one to help me make things a lot more passive, but a lot of investors do like being the one managing the property. So it’s kind of up to you. I just put that in in the step so that you guys can understand if you want to or not. Alright, I hope you guys enjoyed this guide on how to buy your first rental property. I’m really excited for your real estate investing journey. If you guys have any questions, let me know in the comments below.

Also, I do have the free round property toolkit if you guys want to check it out. It kind of outlines the steps as well as talks about the benefits of real estate investing. Again, it’s free, so go ahead and grab it if you want to. But also I do have remote rental riches, which I talked about earlier in the video, which basically is the whole step by step guide on how to buy your first rental property where I’m going to handhold you give you worksheets to print out homework assignments, you can watch me call my dream team. You can see my case studies around properties I’ve done out of state this course does talk about out of state real estate investing but it totally applies if you want to invest locally as well. So I hope you guys enjoyed this episode, please make sure to rate review and subscribe. It really helps our podcast grow. And thanks again. I’ll see you guys in the next one.

Transcribed by https://otter.ai