The Right Way to Buy Your First Rental Property (step by step)
Don’t f*ck it up.
I have hundreds of friends and relatives in Australia and the United States who have tried, but failed miserably when they went for owning multiple rental properties.
There are certain mistakes that they made in the process that can be empathized with and is understandable when you consider the fact they were complete beginners and didn't know better when they were starting. On the other hand, there are some things that they did that are just outright stupid which could’ve been avoided by just searching a few terms on Google.
Many unseasoned real estate investors will lose a lot of money. That is why you need to plan very carefully and consult with the right people, including an experienced real estate agent before you commit to an investment deal.
Whether you are planning on owning multiple rental properties to create cash flow, or just interested in learning more about real estate investing, having a step by step plan that you can always go back to, can help tremendously helpful because it makes the process just that much faster and smoother.
Step 0: Down Payment
Coming up with enough cash for a down payment to buy a house is the first thing you need to overcome when planning to buy a property, it is also the single biggest roadblock for most prospective home buyers. But how much do you really need? Let’s take a look.
A 20% down payment on a mortgage is generally a good idea but you can put down less than 20%. The minimum down payment required for a house varies depending on the type of mortgage and while zero down payment loans may seem attractive to those who either don't have a lot of cash at hand, or just may not be willing to pay more when they can pay less— whatever the case, it will hurt the investor in the longterm due to the obvious downsides:
- When you borrow the full value of your property, you’re more financially at risk in a property value downturn. Without equity in your home right from the start, any loss of value from a declining real estate market can lock you into a no-move situation.
- You’re perceived as a higher risk by the lender, so you’ll likely pay a higher interest rate on your loan. With “risk-based pricing,” lenders charge higher mortgage rates to borrowers with lower credit scores and inadequate or no down payments.
- You’ll probably pay higher fees on your mortgage, too — as well as mortgage insurance premiums
- Your monthly payment will be higher.
How much should you put down on a house?
The optimum down payment amount will depend on your goals and financial situation. A larger down payment will mean a lower monthly mortgage bill, but putting down too much could leave you strapped for cash after you move in.
To help you determine the right down payment amount:
- Use a mortgage calculator to see how the down payment amount affects the monthly mortgage amount.
- Set a budget, and make sure you leave enough cash in hand for home maintenance and emergencies.
- Avoid using all your savings for a down payment. You’ll need cash after you buy a home.
Finally, shop around, do your homework; compare mortgage rates and programs offered by lenders, and check the fees to get the best deal. A very obvious mistake that I’d noticed while evaluating most of my Australian friends’ investments was that they wouldn't do any of their own research on the various home loans available on the market: they’d either go for whatever their friends before them had done or just listen to random people whose situations were completely different than that of theirs.
Step 1: Build Your Credit
Unless you are buying planning on buying a home outright in cash, which is generally a very few people, you will need a loan and in order to do so, you will need to work on your credit score.
If you only have two credit cards and your score is something like 550 and both your cards have late payments on them, you need to take care of that first before you even think about buying a home or investing in real estate.
In some cases, a score in the 500s may qualify you for a loan but keep in mind that in that case your mortgage payments will usually be much bigger and you’ll also have to pay more interest because you’re seen as a riskier borrower. On the contrary, potential lenders will reward a higher score with more choices and lower interest rates.
It’s generally a better idea for the would-be home buyers to wait until they have scores of at least 620. Higher is always better, and those with scores of 740 or more will get the lowest interest rates which means they’ll have more money left to themselves to cover other costs that come with buying a home.
The following are some loan options by various credit scores:
300–499: Few mortgage options
Having bad credit — or no credit — means you’re very unlikely to get a mortgage unless someone is willing to help out.
One of my friends, Ali Mammad actually got a mortgage on a 500 score but that’s because his uncle purchased him the home, added him to title, then refinanced into his name when his credit score had improved sufficiently.
500–579: Poor credit score mortgage programs
If you have a credit score in the 500s, it’s likely that your best choice for a home loan will be one insured by the Federal Housing Administration. But with a credit rating of 500 to 579, be prepared to put 10% down.
“Someone with a 500 credit score is likely to have some combination of collection accounts, liens, and judgments,” Joe Parsons, a senior loan officer with PFS Funding in Dublin, California, says. “Even though FHA will insure a loan with a 500 score, the lender will require that collections, judgments, and most liens be paid off before closing.”
Generally, scores of less than 580 is a definite signal to work on your credit, and more often than not, real estate agents will send clients to lenders to see if they can prequalify for a loan. Those who don’t like the terms they’re seeing can then try to qualify for an FHA loan or work to shore up their credit.
580–619: Some low down payment programs
FHA loans also allow down payments as low as 3.5%, but to qualify, you’ll need a FICO score of 580 or better. Some lenders will also authorize mortgages guaranteed by the Department of Veterans Affairs, or VA home loans, at this level.
620–699: Government-backed and conventional options
Potential homebuyers with credit scores of at least 620 have more options. VA-backed mortgages definitely come into play for active-duty military, veterans and eligible spouses. That can mean you won’t make a down payment and you’ll pay more-favorable interest rates and most importantly, conventional loans — which aren’t backed by a government agency like the FHA, the VA or the Agriculture Department — are available to qualified borrowers with credit scores of 620 or higher.
700–739: Good credit score mortgage programs
Homebuyers with credit scores of 700 or higher qualify for better interest rates. Using a mortgage calculator can make clear how lower rates make a big difference.
At this credit level, you’ll also find lenders who will consider you for higher value homes requiring “jumbo” mortgages.
740 and above: The best interest rates
With a FICO score of 740 or higher, you’re likely to get the most favorable interest rate available, especially on a conforming (non-jumbo) conventional loan.
Borrowers with higher scores also earn a break in the cost of private mortgage insurance (PMI), which is required if they make down payments of less than 20%. In most cases, with a 10% down payment, a 620 borrower will pay 1.1% in PMI and a 760 FICO borrower would pay just 0.30%.
Strengthening your credit score:
If your current credit score won’t permit you to get a good deal on a mortgage, it’s probably best to polish your credit score instead of rushing into it. There are countless videos on YouTube which you can watch and follow the guidelines of, if your credit score is f*cked.
Step 2:
Step 3: Talk to a Lender (first)
You need to talk to a lender long before you go house-hunting.
Most potential home buyers wait to talk to a mortgage lender until they’re ready to buy. Makes sense, right? Why bother digging up your financial statements and filling out a bunch of paperwork if you’re not going to buy right away?
If buying a home is one of your long-term goals, you may be doing yourself a disservice by not talking to a lender sooner rather than later. The goal of any good mortgage lender is to help you get “mortgage-ready.” This means getting you and your finances in order so you can qualify for the best mortgage possible, with financial terms and a monthly payment that makes sense for you and your budget.
Even if buying a home is a few years away, sitting down with a mortgage lender today can help get you on the path to homeownership.
There’s nothing worse than finding your dream home, then realizing that it’s just outside your financial reach. When this happens, you will most likely compare all the homes that you come across, to that first property that you couldn't afford. This will lead to you making emotional decisions.
Here’s what you should do instead:
Find yourself a lender and hand him all your paperwork, tax returns, bank statements, and everything that’s necessary and tell them what your credit score is — don’t have them run your credit score. There are many sites where you check your credit score online.
There are many additional benefits to finding a lender before you do anything else:
You become the seller’s priority
Coming in with a preapproved loan offer, whether you’re talking to a real estate agent or a potential seller, proves that you’re serious. You want to present yourself as hassle- and complication-free, especially in competitive real estate markets. You aren’t “just looking” and a seller can trust that you can actually sign the check.
You know what you’ll be paying at closing
That the first check you write is going to be for more than just your down payment. After you apply for a mortgage, the lender will give you an idea of how much origination fees, title fees, and appraisal fees will cost. While the seller often pays at least some of the closing costs, your share might still be as much as 3% to 6% of the loan amount.
Many of my friends have fallen into the trap of underestimating the small fees and other costs that do not seem significant at first, but it all adds up and at the end, they're left scratching their heads since they didn't have a good estimate in the first place.
You finish the paperwork earlier
You’ll need a lot of paperwork to complete the loan, including tax returns and W-2s from the past two years, pay stubs for the last 30 days, and recent bank statements. Starting the document-collection process earlier will make it easier when it’s time to finalize your loan, and it reduces the likelihood that the seller pulls out because of mortgage complications.
Step 4: See Properties
This is the most fun part. This is where you actually go out there and look at all the houses to find yourself the best deal.
The following tips should help you when you’re seeing properties:
Drive by
First impressions shouldn’t be underestimated. Even before the viewing, you should go and see the property from the outside. Often this is enough to know a property is not for you. You can get a good feel for the neighborhood by driving around nearby streets too. It’s worth doing this both during the day and at night to assess things like traffic noise.
Be prepared
Make a list of all the things that are important to you and any questions you want to ask before the house viewing. Once you’re in the house it’s easy for things to slip your mind.
Take a friend
Never go to a viewing alone. Either take a partner or a friend or attend the viewing with an estate agent. Not only is it safer, but it’s also always great to have someone to bounce ideas off and ask for a second opinion.
Check the outside of the property.
Are there any signs of damp like peeling paint or tide marks on the walls? Are there any loose tiles on the roof?
Be thorough.
Remember, this is one of the biggest purchases in your life. No one will blame you for being nosy. Check all fixed cupboards, especially under the sink. Ask to see the loft too, and take a torch in case there is no lighting.
Check the plumbing.
How long does it take the hot water to come through the tap? Does the heating work?
Check the bills
Ask to see utility and council tax bills so you know what to expect.
What’s included?
Ask what fixtures and fittings the owners will be leaving. Carpets? Oven? Curtain poles?
What work has been done?
Ask how the property has been modified and request copies of receipts and guarantees.
Look out for damp
Damp is one of the greatest annoyances for homeowners. Keep an eye out for peeling paint, stains on the ceiling, and steamed up windows.
Be friendly
Building a rapport with a seller will make you more memorable, which is always helpful when you want your offer accepted. A good relationship with the vendor can help with a smooth sale too.
Price ranges
Picking the right price range when searching for a new house is important because, otherwise, you could miss out on finding the right home. However, you also do not want to waste time looking at homes that do not fit your criteria because they cost more than what you want to pay.
The only thing worse than finding your dream home and discovering that the seller will not bend on price is not finding your home at all because the price range you chose was wrong.
As the buyer, you should work with an expanded price range. For example, if your maximum purchase price is $399,000, you should not set up a property search with an upper-end price point of $399,000. By doing so, you will miss houses priced at $399,950 or $405,000, which you may still want to consider.
Step 5: Determine Cash Flow
Too often new investors get disillusioned with real estate because they simply have unrealistic expectations about what they’re likely to achieve when it comes to their property’s cash flow. The sad reality is that 90% to 95% of properties either don’t cashflow or end up breakeven.
This is why it’s absolutely crucial for you to find the cash flow of the property you’re thinking of buying. The way you’d do that is by going and looking for houses in the same price range with similar attributes to determine what they're renting out for.
Once you have an idea of what similar places are renting for, you’ll need to know what the ownership costs of your property is going to be. This is really important since homeownership — by most novice investors — is often considered as being a single expense i.e. the purchase price of the property. However, if we were to truly analyze the situation, homeownership consists of several expenses. It is crucial to add all these expenses when finding the cash flow of a property:
- Down payment
- Mortgage payments
- Interest Rate (plus loan terms)
Take these three numbers and punch them into a mortgage calculator so that you can come up with the monthly amount you’ll need to pay for your mortgage.
From here, you’ll need to calculate what your state’s property taxes are; once you know the amount you’ll have to pay as your monthly property taxes.
You’ll also need to get insurance for your property and this means you’ll have to pay a few hundred bucks extra.
You also need to keep random expenses in mind too that can pop up in the form of pest control, toilet fixes, or vacancies.
Once you have a rough idea of what your monthly expenses will be, you’ll now need to decide what your place will rent out for and if your rent doesn’t exceed your monthly expenses, your property won’t cash flow.
Let’s assume the monthly expenses of your $80,000 down property ends up being $2600 and the amount that you get in rent is $3200, to find cash flow, you’ll subtract your expenses from your rent which should — in this example — leave you with $800 at the end of every single month.
As a beginner, you MUST find a property that cash flows — or in the worst-case scenario, it should at least end up breakeven — and remember that purchasing a positive cash flow property can be difficult, especially if you have never done it before.
A lot of people just give up on the idea of investing statting, “positive cash flow properties don’t exist anymore” but this couldn’t be further from the truth if you take your time, do the figures properly, don’t get emotional, choose the right loan and increase your rental income by tweaking the property.
Do the figures on a number of properties to see which ones will give you the best cash flow return. Also, it helps to play around with the figures and see what would happen if you changed certain things.
Would it be positively cash flowed if you increased your deposit, or increased the rent by 10%. Could you still afford the property if interest rates rose by 1% or if it was vacant for 10% of the year?
The more figures you do, the easier it will become to spot a positive cash flow property quickly. You can use the variety of online property calculators to help you do your calculations quickly and easily.
Step 6: Look for Older Homes
By older homes, I mean properties that need minor cosmetic renovations.
It’s common for house hunters to focus their efforts on finding homes that are new and modern. And there are plenty of benefits to buying a recently constructed home. For one thing, you might save money on repairs, at least initially, thanks to that home’s newer features and components. And many newer homes today offer open floor plans, which may align with your taste.
But despite all that, it could still pay to buy an older home rather than opt for a newer one.
1. You save serious money on its purchase price
Because so many people set their sights on newer homes, owners of older homes often have no choice but to list their properties for less. That could work out very well for you as a buyer, especially if you’re on a tight budget. In fact, opting for an older home could help you get into a neighborhood that’s generally out of reach financially.
The money that you save on the purchase price can be used to fix up your property’s exterior to make it look good which will surely increase its cashflow significantly.
2. Your property taxes will be lower
Homes are assessed based on their market value, so a house that sells for less could also result in lower property taxes. Furthermore, tax assessors tend to assign value to updated features like high-end countertops or fixtures — as crazy as it sounds — if your home is older and doesn’t have these features, an assessor will have a harder time hitting you with a higher assessment.
3. You might get higher-quality craftsmanship
A lot of the homes constructed today feature builder-grade materials that not only make them look cheap but also degrade easily, resulting in added maintenance and repairs. One final benefit of buying an older property is that you may be privy to better craftsmanship and materials. And that, in turn, could save you money with regard to upkeep. Or, to put it another way, if you buy a home that’s managed to hold up for over 100 years, there’s a good chance it will remain solid for 100 more.
To be fair, buying an older home has its drawbacks. You could get stuck with dated appliances and a heating and cooling system that aren’t energy efficient. You may also find that an older home doesn’t quite meet your or your potential tenant’s aesthetic needs. But if you’re the type who appreciates a home with character and if you can make the house look good, it could pay to look at the older homes available in your target neighborhood. You may find that you not only score a great deal but snag a home that truly stands out.
Remember: You want an old home that isn't the sexiest deal cosmetically, but it has to be perfect when it comes to functionality because the truth is, cosmetic issues will not cost you a great deal of time or money to fix.
Smart Renovation 101
It’s important to invest in your rental property to make it tenant-friendly and make it look as good as possible. The following are some tips you can follow to make your rental property look all shiny and new without spending too much money:
Kitchen Cupboards
You’ve probably already thought of painting the cupboards — and that’s a great way to brighten up a place and make it look fresh, but you probably will have to strip, sand and prime to make that happen. You can do the work, but the time investment is pretty high for you to get a good result.
A cool, quick, and low-cost way to get the same result is using a great product from Rustoleum that is called Cabinet Transformation Kits which come in many different colors. The kit costs only $100 and is really easy and quick to use. Just clean the cupboards, paint the cupboards and the end result is a kitchen that looks almost new!
Bathroom Vanity
The kitchen renovation ideas apply to bathroom vanity renovations too!
But, a quick trip to IKEA or Costco could get a brand new vanity at a minimal cost.
If you want something a little special for a low cost you can hop on the website Pinterest for inspiration.
Fix the Holes Yourself
There are always small drywall repairs to be done before paint jobs. Save money and do these jobs yourself before you hire a contractor to do the rest of the work. Small holes are easy to cover with and sand and take no time at all. Larger holes are fairly easy to fix by inserting small pieces of wood in the hole in the drywall. Here’s a great explanation of what you need to do (with step by step pictures).
Fixing your own large holes can save you upwards of $200/hole … so it’s well worth your time to make these quick repairs yourself.
Hire Low-Cost Painters
Fresh paint always has a great payback. It makes the place feel cleaner and just makes a place more appealing for showings.
It’s a low skill job so you’re probably tempted to do the work yourself, but save your back and time by shopping around for the labor.
You can hire a painter for as low as $15/hr on sites like Kijiji or Craigslist.
Of course, you shouldn’t just pick the lowest price. Check the references to ensure that the workmanship will be equal as well. Costs for painting 1,200 square feet with lots of trim details came in from $1,000 — $4,000 plus materials. My aunt who lives in the UK recently hired an experienced semi-retired painter who did the job for $1,200 and she bought the materials at his cost at his preferred paint store.
Light Fixtures
Light fixtures are an upgrade that can really change the mood of any room. You can bring an entire space from the 70’s to the current year by changing up the fixtures. The best part is that light fixtures can always be found on sale at regular hardware stores or online.
Again, if you are handy and ok with electrical, this is a great project to do yourself to save money. An electrician can cost you upwards of $100 per hour so you can hire them to do it, but that will cost you a lot more. You can also change light switches to a new style one for a very small cost and place sensor switches in rooms that you enter frequently for short periods like a pantry, laundry room, or bathroom. These are nice features for tenants and for resale.
Granite Countertops
Many think granite is too expensive, but everyone wants it. Depending on your market (it’s always important to understand your market), it could be that these kinds of upgrades are expected. The younger generation wants upgrades like they had in mom and dad’s house.
If you just need a straight piece of countertop, it’s possible to do a ‘do it yourself’ granite countertop. Most of my relatives in Australia have installed their own granite and I have to say it was very satisfying.
If you do it yourself, you may need a friend (or, two) to help lift the countertops when you’re ready to move them, but it’s possible that with one cut you may have your counter.
Step 6.1: Location
The key to real estate investment is finding properties in a location that can generate positive cash flow, build equity, and appreciate over time. To do this, you need to perform thorough market research on which locations would be best for this. The end goal is to invest for profit, but that won’t necessarily come from the most expensive area.
Real estate is all about location. Location is perhaps the greatest determining factor in the affordability, availability, and demand for housing. A more desirable location will almost always result in higher prices when compared to similar homes in less desirable locations.
Picking the wrong location is likely to be more detrimental to the outcome of your investment than the level of investment you’re making.
So, what is the ideal location for a real estate investment?
The general answer is the location should be desirable to the particular person you’re trying to attract while returning a profit to you at the same time.
There are many things you need to keep in mind when choosing a suitable location for your property and the following are some of the most important ones:
1. Type of neighborhood
This is a matter of personal preference more than anything else. Do you want to invest in areas primarily occupied by families, young professionals, college students, etc.?
Take my uncle, for example, he liked to invest in areas where college rentals dominate the market, but this strategy isn’t for everyone. According to his experience, it’s easier to find tenants that way (especially if you list the property during the summer), but college students tend to cause more damage than older renters and tend to move more frequently.
2. Population growth
This is an easy one to understand. You want to invest in areas where people are moving in, not out. You can ask your real estate agent about where they are seeing the most shopping activity, the most demand for homes, and other growth-related factors.
3. Unemployment rates and job growth
You should generally try to avoid investing in declining neighborhoods. If jobs are leaving the area and unemployment is rising, it’s typically a negative catalyst for the local real estate market. On a city level, you can see employment, wage growth, and other important trends at City-Data.com, and your real estate agent should be able to tell you where jobs are growing or declining within your city.
4. Walkability
Obviously, if you’re buying a rental property in a major city, there are going to be some amenities within walking distance. If you’re in a market where not all homes are walkable to stores, parks, public transportation, and other such destinations, but yours is, it can be a big selling point.
For example, one of my friends owns a triplex located a block away from a major grocery store and with three popular restaurants within a half-mile, even though it wasn't located downtown. And not coincidentally, that’s been his easiest rental property to keep fully occupied.
5. Nearby amenities
On a similar note, while not every property can be walkable, having tons of businesses nearby can be the next best thing. Simply put, many renters don’t want to be in the middle of nowhere, even if the home is nice. They don’t want to have to drive 15 minutes to get to a grocery store or to get a cup of coffee.
6. Public transportation
While it isn’t the most important factor, easy access to public transportation, such as bus or rail service, can open your property up to many more potential renters. This is especially true in markets surrounding major cities.
7. Crime rates
Just as being in a safe neighborhood is an important factor to homebuyers, it’s a common priority of renters as well. Before you decide on an investment property, it’s a smart idea to check local crime data in the neighborhood. There are several good websites for this, such as CityProtect, which has interactive crime maps you can search through.
As a final thought, location should be the number one factor when starting your investment property search — more important than the selling price, the number of bedrooms, need for renovations, and whether the home has good outdoor space or not.
Don’t get me wrong — those are all important things to get right. However, you can potentially add square footage, update an older kitchen, or get a yard nicely landscaped. The location of your property is the one thing that you have no ability to change after you sign your purchase agreement.
Step 7: Make Offers
Assuming that you got everything else right, now it’s time for you to make offers on your potential investment properties.
One thing you need to keep in mind is that, initially, you will lose out on a lot of offers and understand that it is a normal thing when you are making low offers that suit your budget and making offers that make sense to you. Once you find a suitable property you’ll also need to do everything in your power to make your offer stand out:
Tip #1: Show that you can actually buy the property
The most enticing offer in the world is meaningless if a buyer can’t afford to buy the property. One of the biggest fears a seller has is taking the property off the market for a month or more, only to find that the deal falls through when the buyer is unable to obtain financing.
If you’re planning to finance the property, it’s a good idea to submit a preapproval letter from a reputable lender. This shows that not only can you afford the property, but the lender has done any necessary credit, income, and asset verifications to ensure that they’re actually willing to give you a loan.
Note that preapproval is different from pre-qualification — a preapproval is a commitment to loan you money, provided that the property meets the lender’s standards and your situation doesn’t change dramatically.
Tip #2: Offer a large earnest deposit
When you submit an offer to buy a property, it’s standard practice to submit a small deposit to show the seller that you’re serious. This is known as an earnest deposit, or “earnest money.” Essentially, if you fail to buy the property and don’t have a contractually valid reason, the earnest deposit is given to the seller.
Expectations for earnest deposits vary by market, but roughly 1% of the home’s value is a good rule of thumb. For example, if you’re offering $479,000 for a home, it’s usually reasonable to offer a $5,000 earnest deposit. However, in some markets, a smaller ($500 to $1,000) deposit is standard, regardless of the home’s value, and in hotter markets, a higher amount could be expected.
If you want to make your offer stand out, consider showing the seller that you’re really serious by including a larger-than-expected earnest check. If $5,000 is expected, consider offering $10,000. After all, your earnest deposit is applied toward the purchase of the home when you get to the closing table, so it doesn’t cost you any additional money in the end.
Tip #3: Think about your contingencies
There are three major contingencies that appear in most real estate contracts: financing, inspection, and appraisal. And by getting a little creative, you could use them to make your offer stand out:
- Financing: I never suggest waiving the financing contingency unless you’re prepared to pay cash for the property, even if you’re 99.99% sure that you can get approved for a loan.
- Inspection: It’s generally not a good idea to waive your right to inspect unless you’re planning to completely renovate the property or tear it down. However, you could offer a shorter inspection period — say, five days from the contract date instead of 10.
- Appraisal: For most buyers, if you’re going to waive one of your contingencies, this is it. Essentially, the appraisal contingency gives you a way out of a deal if the property doesn’t appraise for the contract price. By waiving this, you’re agreeing to purchase the property even if the appraisal comes in low. In hot real estate markets, this can be very appealing to a seller. The risk is that if the appraisal comes in too low, your lender might not want to loan you as much as you expect, and you’ll have to cover the difference out of pocket.
The bottom line is: sellers don’t like uncertainty — period. By showing that you’re financially capable of buying the property, putting more of your money on the line than you have to, and making the contingencies in your offer as light as possible while still protecting yourself, you can help reduce the uncertainty in the eyes of the seller and could make your offer stand out in a bidding war.
Step 8: Inspections
Assuming you have a deal under contract, now it’s time for you to inspect the property to make sure it’s in decent condition or to figure out what’s wrong with it if it’s not in decent condition.
Most real estate purchasers have little to no prior knowledge of, or expertise in, real estate and construction. Professional inspectors have the knowledge, skills, and experience to detect costly problems, so it is very important to include an inspection in the home buying process (particularly when buying a home built on improved land).
A proper home inspection is your best defense against buying a property that will be a home improvement nightmare.
Most of the value of residential land comes from the house. A house with one or more severe structural, electrical, heating, or plumbing problems can cost tens of thousands of dollars or even more. Consequently, spending a few hundred dollars on an inspection is worth the investment.
It’s also shouldn't be an issue if you’re planning on inspecting the property yourself as long as you know what to check. The following tips can be useful if you’re planning on inspecting your potential property:
Do Your Own Pre-Inspection
You can really learn a lot about a house just by looking at it. Make sure you do your own home inspection and note any possible issues.
Look at walls and ceilings for any evidence of water damage (discoloration, stains, etc.). Try all the light switches and outlets you can to make sure the electrical layout makes sense. Peek at the electrical panel to see if there are any potential wiring issues (look for new wire, old wiring that isn’t hooked up, etc.). On the outside of the house, look for drainage issues, areas with peeling paint, around decks and porches, inspect the siding, etc.
Going into your official inspection, you should have a good idea of things you’d like your inspector to pay extra attention to.
Get Pictures for Proof
Any home inspector worth using will bring a camera along on the inspection. The inspector will also be heading into places that you won’t want to go if you don’t have to (the roof, crawl space, under decks, the attic, etc.). Ask your inspector to photograph any potential issues that come up so you can see the issue for yourself and make sure you fully understand the problem.
Infrared and thermal cameras can give you and your inspector a look behind walls and floors that you otherwise wouldn’t be able to get without ripping out drywall or flooring. Because this technology is so accessible, your home inspector should use these pieces of equipment throughout the inspection (though some home inspectors may charge an additional fee for this service).
Pay Attention to the Roof
A home’s roof plays a huge role in keeping the interior in good shape. It’s also one of the most expensive and labor-intensive parts of a house to replace.
Try to find out when the roof was last replaced, and whether or not any warranty exists. Make sure your home inspector actually goes up on the roof during the inspection (unless it’s physically unsafe to do so) because there’s only so much you can see while standing on the ground.
Keep your eyes peeled for curling or missing shingles and pay special attention to anywhere there’s a chimney, vent, or skylight to look for signs of water intrusion. You can also see signs of water issues in the attic if it’s accessible.
Look for Cosmetic Fixes
Freshly-painted walls and new floors are often signs that a homeowner cares about the home they’re selling. But sometimes these things can also be cosmetic cover-ups of underlying problems. Pay attention to any suspicious fixes — only part of a floor patched or repaired or only part of a wall is freshly painted and ask your inspector to take a closer look.
Test GFCIs
GFCI outlets are part of the building code in rooms where moisture is present (kitchen, bathroom, laundry room, etc.). Your inspector will know how to test these outlets properly, and malfunctioning or non-working GFCI outlets could hint at bigger electrical problems.
Plumbing
Losing water pressure or dealing with a slow drain can be indicators of larger plumbing issues. Make sure bathtubs and shower pans are leak-tested. And have the home inspector inspect the water main and shutoff points (very useful knowledge if/when you take ownership of the property).
Furnace and Water Heater
Beyond making sure the furnace and water heater work properly, you should find out how old each one is and the last time each received service.
Replacing a furnace or water heater can be pricy, so if either one is in need of replacing soon, you need to keep that in mind while putting together your offer on the property. You can also get a feel for how the furnace is cared for by checking the furnace filter. A filter that’s in obvious need of changing can hint at other postponed or ignored maintenance.
Don’t Forget the Basement
An unfinished basement will give a lot of clues to the condition of the house and foundation. Look for cracks, signs of repairs, and water issues. A crack in the slab or wall is not always a dealbreaker, but understanding why a crack appeared is important. Your home inspector will be able to tell you if anything needs further inspection from a structural engineer.
It’s important that if you find any issues regarding anything, you approach the seller and either ask for credit or price reductions which should compensate you for those problems.
ALWAYS ASK.
There is no shame in asking your seller for something that would otherwise cost you — the buyer — hundreds or thousands of dollars if you hadn't done so. The worst-case scenario is if they say no and you can think of something else then. My point is that there’s virtually no risk in asking for credit or compensations, so, why not try?
Step 9: Closing Costs
Typically, home buyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees. So, if your home costs $150,000, you might pay between $3,000 and $7,500 in closing costs. On average, buyers pay roughly $3,700 in closing fees, according to a recent survey.
Closing costs vary widely based on where you live, the property you buy, and the type of loan you choose. Here is a list of fees that may be included in closing.
You can avoid upfront fees on your loan by getting a no-closing cost mortgage, in which you don’t pay any of the closing costs when you close on the mortgage.
Typically, when a lender offers a deal like this, it does end up costing you in the long run: The lender may charge you a higher interest rate on the loan for not paying closing costs, or the lender may wrap the closing fees into the total mortgage owed, in which case you end up paying interest on the closing costs.
Finally, homebuyers can negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyer’s closing fees.
Step 10: Renovate That Baby!
It’s only natural that you — as a good landlord — want your tenants to like your place and to stay there for as long as possible. You don’t want your future tenants to leave after two months without offering any explanation, do you?
If you want to maximize your profit and keep your future tenants happy, there are a few things you could do. One of these things is to renovate the place before you actually decide to rent it because it will also bring you more money in the long run.
And remember, your first priority should be finding a good contractor who actually cares about your project — be it small or big — and one who can get the job done in a reasonable time at a reasonable price. If you hire a contractor with a license and a good reputation, you are guaranteed to avoid unfinished work, financial wrongdoing, and fraud.
The following are some practices to follow to find a good contractor:
The National Consumer Law Center has a list of suggestions for homeowners looking for a home improvement company:
- Do not hire an unknown contractor who solicits business by knocking on your door. Deal with companies recommended by friends or reputable building supply stores.
- Before agreeing to hire any home improvement contractor, get a second estimate for the same work from another contractor.
- Get references for the contractor and speak to those references. Ask about satisfaction and any problems that arose.
- Look at other work performed by the same contractor.
- Check with the state licensing body to see if the contractor you are considering is licensed.
- Get a written contract describing explicit specifications of the work, the price (including details of any financing or credit terms), the responsibility for cleaning up, and the hourly rate for any added work. Ask for guarantees and other promises to be made in writing.
- If the written documents are different from oral promises, do not sign them.
- A 3-day right-to-cancel applies to door-to-door sales and home improvement loans even after the papers have been signed.
- Do not allow a contractor to begin work until financial arrangements to pay for the work are complete.
- Do not agree to pay the final payment until the project is finished.
- Do not consolidate other debts with a home improvement loan.
- If problems with a contractor or home improvement lender arise, get help from a lawyer or housing counselor immediately.
Once you have a good contractor who you can trust, it’s time to make that home look good!
Remember to not go overboard with this or spend a buttload of money and keep it simple.
Step 11: Rent It Out!
This should be the most fun part since this is why you went through all this hassle in the first place.
There are some things you absolutely shouldn't overlook when renting out your property — one of those being, taking quality pictures of your home.
Do you ever notice that when you go onto a professional real estate page or a website like HGTV.com, you find that the pictures are literally pulling you into the rooms they have listed? You can imagine yourself being in that particular room enjoying all the amenities it offers.
This is exactly how you want a renter to feel when they come across your listing. When a renter starts searching for a place, their eyes will naturally be drawn to the images you have listed before any other details and they will quickly determine whether it’s worth spending any time checking out what you may have to offer.
It will be well worth it if you actually go out and either hire a professional photographer or even ask an artsy friend of yours who you think will do the job just fine.
Once you have listed your property and your offer is online, the next thing you need to take care of is customer support. Make sure that you immediately get back to people who contact you and want to check out your property.
As far as advertising your property goes, some of the best sites to do that are Craigslist, Apartments, Zillow. Trulia, Redfin and don’t forget to list your property on all of these sites, not just one or two, because you never know where someone could be looking for the exact offer that you have.
Once you find a tenant and your property starts to cash flow, you can save up for another property’s down payment and repeat this process all over again.
Good for you, the more you do this, the more familiar you’ll become with the process and ultimately become better at the whole thing.
