Getting Ready to Buy Your First Rental Property

You’ve finally decided that you want to get into real estate. And you’ve decided that you don’t want just any real estate job, but you’ve decided that you want to be an investor. The first step in this long journey is to buy your first rental property.

You’ve heard of all the stories of landlords living on beaches, managing their rental from afar. You’ve heard the story of the 9-5 worker who finally quit his miserable day job and now has enough rental income to not need to work a single day in his life. Or the millionaire with the expensive cars and homes, all funded through real estate investments.

You have something in common with all these stories—you and the investors above all started in the same place: Buying the first rental property.

The first rental property is my favorite. It’s the start of a new journey. A step into a long and tiring, but rewarding and extremely lucrative path. It’s when you finally apply all that you’ve learned and make the first move. The most important move.

You’ve read all the books you needed to read. Browsed dozens if not hundreds of blog posts and listened to hours of podcasts. You’ve spoken to everyone you know and told them about your new endeavor. Maybe it was met with resentment. The safer route, definitely, is the W2 route. 

But lawyers and doctors don’t have near as much fun as real estate investors do.

You don’t want to buy a job, you want to buy the income. You don’t want to work a set schedule for the rest of your life, you want your schedule to work for you. 

As with any new endeavor, there are prerequisites to getting started. Real estate investing is no different. 

Here are the five most important components you will need to get your first deal found and funded:

1. Have a real estate agent—obviously, you can’t find properties to invest in if there’s no one looking. You’ll need to find a good agent. Not just any agent. Don’t pick the first one that comes along. Talk to them. Many of them. Get to know them. Get a sense of how they work. Will they respond within an hour or a day? In a hot market, an hour is all it takes for your dream deal to get bought up by someone else. Do you and the agent get along? Does the agent understand your needs? Does the agent work hard? Are they young and hungry or are they a seasoned veteran with an already long list of investors? How well do they know the area? How long have they lived there? How trustworthy are they? How well connected are they? Go to open houses and meet several agents to get a better idea about who you’d like to work with.
2. Have good credit—there are dozens of ways to get your rental property deal funded with bad credit. Most notably hard money lenders. However, even they will not lend to someone whose credit is in the gutter. Also, your rate and terms will be much better the higher your credit score is. Pay off your credit cards, and your personal loans, get your DTI (debt-to-income) down, and be in good financial standing before you go out looking for properties. There is nothing worse than a deal falling through halfway into the lending process simply because unforeseen circumstances come up on the financial side of the borrower. I write more about improving your personal finances here.
3. Have funds in your savings account (or a way to get them)—Any kind of loan will require a downpayment. Yes, the old 20% benchmark. However, some loans can be acquired for as little as 3.5% down. Still, you’ll need some form of savings, or, you’ll need access to those funds. This is what a private lender is for. It could be anyone in your family, a friend, or even an acquaintance. Depending on the types of deals you are looking to fund and the type of loans you are looking to fund them with, you might need anywhere from $5,000 to $100,000 in savings before you take on the endeavor. 
4. Get pre-approved—look, I get it. I want to jump the gun too and just start shopping for deals and putting out crazy offers on every great property I find. But that’s just the wrong way to go about things. Getting pre-approved means you provide a lender with your financial profile, as well as a soft credit check so that the lender will let you know how much they are willing to lend you. Knowing this, you then go out and look for properties in your price range. On my first property, the lender capped me at $315,000 for a conventional loan at 2.875%, a ridiculously low rate (practically free, when you consider inflation), so I didn’t bother putting in an offer on any property priced over that amount because I knew I wouldn’t qualify for it. Also, it’ll save you the heartache of having the rental property under contract, only to have the property fall through because you put in an offer you could not afford, giving you a reputation for being an unreliable investor.
5. Have your team ready—besides the agent, you will also need an inspector and a contractor. Find a good contractor before you buy your house, and let them know to pen you into their schedule. Tell them that you will be needing an estimate during the inspection period. I usually have my contractor show up at the same time as the inspector. They know each other and have worked well together in the past. The inspector tells me what he finds, and the contractor quotes me how much it’ll cost to fix. This has several benefits. For one, I know how much to lower my offer after the inspection period. Two, I know how much renovations will cost, and I can adjust my budget (or my expectations) before I close on the property. And three, I can coordinate with my contractor regarding the kind of work I want to do on the property, and with the inspector there too, I can get feedback from both parties regarding what is feasible, what is necessary, and what is beneficial.

The first property is always the hardest. Once you’ve got your first property under your belt, the second one becomes easier. The third is even easier than the second, and so on.

Do not let the magnitude of the task scare you. Follow the guidelines. There is ample material on the internet for every imaginable situation that has come up for real estate investors in this line of work.

Follow the advice, keep yourself calm and focused, and you’ll be an investor in no time.