We’re excited to be launching a 12-part learning series for Landlords covering every phase of the Landlord lifecycle. Over the course of the next year, we’ll share a new section of the series every month in our newsletter. We hope you’ll join us for the entire series!
To start things off, we’re looking at best practices for Finding & Acquiring Rental Units. The rental properties that you add to your investment portfolio have a major impact on your overall success as a Landlord. Whether you’re buying your first or tenth rental unit, it’s important to be strategic about where, what, and how you buy.
To help ensure you get the most out of our real estate investments and are set up for success as a Landlord, here’s a step-by-step guide for finding and acquiring investment properties.
Take Action For Finding & Acquiring Rental Units
1. Determine Your Investment Strategy
The first thing investors need to think through is what their investment strategy will be, as this can have a big impact on what and where they buy. There are lots of different strategies that investors employ – for example, focusing on Section 8 housing, multi-family properties, single-family long-term rentals, fixer uppers, short-term and vacation rentals, or a “Buy, Rehab, Rent, Refinance Repeat” strategy.
There are pros and cons to each strategy, and personal factors like the amount of time you have to invest in the property, the amount of cash you have, and your comfort level with risk all play a role in determining what strategy you employ. An additional factor to consider is your investing goals – whether you’re prioritizing cash flow or appreciation and whether you want to take a short or long-term approach to returns.
For first-time investors unsure of how to start, we’d recommend a buy-and-hold strategy focused on single-family homes. Despite market volatility, single-family homes are projected to see steady appreciation in the coming years and rental markets remain strong, with steady demand and rising prices. We’ll discuss the importance of researching your local markets below, but a buy-and-hold strategy is a good bet in most markets right now.
2. Create a Property Management Plan
Once you’ve decided what your strategy is, it’s important to think through how you want to manage your property. Investors have the option of hiring a property management company or managing rental properties themselves.
The key benefit of using a property management company is that it means less time and headaches for investors. Generally, property management companies handle all phases of the rental cycle – from selecting Tenants to move-out. This means you don’t have to spend time dealing with repairs or managing Tenants.
The downside of using a property management company is that it means less control over how your property is maintained and fewer profits. When you manage a property yourself, you can ensure that you have quality Tenants, you can work to build strong relationships with those Tenants to increase retention, and you can ensure that all repairs and maintenance work is done well. In contrast, when you work with a property management company, you hand off that control, which can mean that your property isn’t as well cared for as you’d like.
In addition, you hand off a portion of your monthly income to the property management company. On average, property management companies charge a fee of around 8-12% of the monthly rent.
We’re strong advocates of managing your own rental properties. While the extra cash is nice, the bigger issue for us is the control over how the property is managed. You want to make sure you have quality Tenants in your property, that those Tenants receive good customer service from their Landlord, and that the property is kept in good condition. Rental properties are big investments, and we advise investors – especially first-time investors – to manage their own properties in an effort to get the most out of their investment.
3. Create a Plan for Financing
The next thing investors need to consider is how they’re going to finance their property. There are more financing options than many investors realize, each offering some distinct pros and cons. Here are a few to consider:
- Cash Purchase: If you have enough cash available, you can consider a cash purchase. Being a cash buyer can sometimes help you negotiate a lower purchase price, given that you can close quickly and don’t have a risk of financing falling through. Additionally, when you buy with cash you have increased cash flow each month and fewer risks. The downside of a cash purchase is that you’ll see a lower return on your investment than you’d get if you took advantage of leverage.
- Traditional Loans: This type of loan generally requires a down payment of 20-30% for investment properties and can be time-consuming to secure. That said, it often offers competitive rates and enables an attractive monthly cash flow.
- Private Loans: A private loan is one that comes from a private lender, which could be a friend or family member, a company specializing in private loans, or a group of lenders. These types of loans are usually quicker to secure and more flexible than traditional loans. Depending on the situation, they can involve higher risks or increased rates.
- Hard-Money Loans: Hard money loans are secured by the real estate purchased with the loan. They generally require lower down payments and are more accessible for borrowers with a low credit score or poor credit history. That said, they are usually short-term loans with higher interest rates. As a result, these are best for fix-and-flip investors but less appealing for buy-and-hold investors.
Financing is a very personalized decision, but a key takeaway for investors or potential investors should be that there are lots of options. Don’t shy away from investing because of financing concerns. Instead, research potential options to find a strategy that works for you.
4. Select a Location to buy your rental property
While all phases of this process are important, selecting the location might be the most important. “Location, location, location!” is a real estate cliche, but it’s one that investors need to keep in mind. The location of your property has a major impact on rental values, vacancy rates, and appreciation rates.
When selecting a location, you want to find an area with a growing population, strong employment opportunities, and a low vacancy rate. Other factors to consider are average rent prices, the ratings of schools in the area, nearby amenities, and local crime rates.
If you’re going to manage the property yourself, you need to consider accessibility and only focus on areas that you can get to on a regular basis.
Given the many factors to consider, deciding on a location can be difficult. Here are a few things to keep in mind:
- Online tools like realtor.com and Norada can help you research potential areas. Additionally, census data can help with population growth and employment data.
- Try to find up-and-coming neighborhoods. This gives you an opportunity to find ways to buy at a discount. For example, areas with lots of construction might mean good long-term growth opportunities.
- Even if you’re not planning to buy close to home, spend some time in the area where you’re going to invest. Drive around neighborhoods and familiarize yourself with the market. Real estate is very localized, so you need to be familiar with the area where you’re going to buy.
5. Search for Available Properties
Once you know where you want to buy, it’s time to start looking for properties. As with every phase of this process, there are lots of different ways to do this. Some investors work with a realtor, others only buy houses off-market, some focus on foreclosures, and others simply search online listings.
When determining the right strategy, it’s important to consider your comfort level with the buying and closing process. If you don’t have much experience, it can be helpful to work with an agent. However, if you’re comfortable handling negotiations and closing logistics, you can save money by not paying a real estate commission.
Similarly, you should consider how much time you can devote to the purchase of a new unit. While buying off-market properties can mean opportunities to buy at a discount, it usually takes more time to find this type of deal. Additionally, purchasing foreclosures or fixer-uppers provide opportunities for buying at a discount but usually mean you’ll need to have extra time and cash available upfront to get your property ready for the rental market.
There’s no one right way to search for properties, so pick a strategy that works for you and get started!
6. Research Potential Properties & Estimate Your ROI
Once you have a property in mind, it’s important to do thorough research to estimate your annual return and long-term growth potential. Here are the calculations you should do for every property:
- Estimate annual rental income. You can do this by looking at rent prices for comparable units and by using online tools like >Rentometer.
- Estimate annual expenses. These include taxes, insurance, mortgage payments, and fees for maintenance and repairs. We recommend estimating 1-2% of the purchase price for annual maintenance costs. If you plan to work with a property management company, you’ll need to include that fee.
- Estimate your upfront investment. This includes your down payment and any immediate repairs or expenses you’ll have before renting the property.
You can calculate your annual Return on Investment (ROI) by dividing the annual cash flow (rental income minus expenses) by the amount of cash you invested upfront. This will give you a good understanding of your expected cash flow and return for potential units.
Some investors have a minimum ROI – for example, 8% – and won’t consider a property unless it hits that target. Others use a 1% rule to evaluate a property’s potential, meaning they focus on properties where the expected monthly rental rate is 1% of the purchase price. We like to use this as a guide but appreciate that it can’t be used as a hard and fast rule.
There are lots of strategies that will lead to good results in the short and long term. That said, all investors need to be familiar with expected returns and expenses for a potential unit to ensure they’re making a sound investment where rental income will exceed expenses.
7. Make an Offer & Close
Once you’ve found a unit that will meet your investing goals, it’s time to make an offer. When doing so, here are a couple of tips to keep in mind:
- Know exactly how high you’re willing to go and don’t go any higher. Real estate investing should not be an emotional decision. If you can’t get the property at a specific price, the numbers won’t work. Know that number ahead of time and don’t go above it.
- Always look for ways to buy at a discount. Some investors only buy 10, 20, or even 30% below the market value of a property. You can do this by finding buyers that need to sell quickly, purchasing properties that need repairs, or finding sellers in financial distress. If you’re looking to buy at a substantial discount, keep in mind that you might have to make lots of offers before one is accepted. That’s okay – be patient and find the deal that works best for you.
Good luck as you work to find and acquire your first – or next – rental unit. If you have any questions, contact us on social media or online. Our team of Landlords would love to support you in any way we can.
And, come back next month as we dig into the next phase of the process: getting your new rental unit ready for Tenants.
Kevin is passionate about helping others to become a better Landlord by providing tools and education to help them thrive.