How To Buy Your First Rental Property (Step by Step)

Summary

In this comprehensive guide, Graham outlines the steps to purchase a rental property, emphasizing the importance of a substantial down payment, a strong credit score, and thorough due diligence. He advises on securing loans, evaluating cash flow, and making smart renovation choices for a profitable investment. The script also covers finding the right property, navigating the buying process, and scaling up over time for long-term financial success.

Takeaways

• 💰 Start by saving for a down payment, typically 15-20% of the property's value, to invest in real estate.
• 🏦 Work on improving your credit score, aiming for above 740, to secure the best mortgage rates.
• 📋 Have your tax returns and bank statements ready, as lenders will review the last two years of returns to assess your income stability.
• 🤝 Consult with a lender first to understand your budget and avoid wasting time on properties out of your price range.
• 🔍 View a wide range of properties to understand the market and recognize a good deal when you see one.
• 🏡 Consider investing in single-family homes, duplexes, or triplexes for better financing terms and potential for appreciation.
• 💸 Calculate cash flow carefully, ensuring that rental income covers all costs and provides a positive return on investment.
• 🛠 Look for properties needing minor cosmetic renovations, which can offer significant returns on investment.
• 🚫 Avoid properties in undesirable locations or with features that are hard to maintain and may decrease the property's value.
• 📝 Be prepared for the negotiation process, including making offers and potentially hiring a competent real estate agent to assist.
• 🔑 Once purchased, manage the property effectively, including timely renovations and tenant screening, to ensure a smooth rental process.

Q & A

What is the typical down payment percentage required by most lenders for buying real estate?

Most lenders typically require a down payment of fifteen to twenty percent for buying real estate.

Why is it recommended to have a credit score above 740 when applying for a mortgage?

A credit score above 740 is recommended because lenders give better interest rates to borrowers with higher scores, which can result in significant savings over the life of the loan.

What are some strategies for improving one's credit score before investing in real estate?

Strategies include paying off all debts in full, ensuring no accounts are in collections, disputing any late payments that can be removed, and utilizing resources like YouTube for guidance on credit improvement.

Why is it important to have tax returns in order when applying for a loan?

Lenders review the last two years of tax returns to assess the average income, which is used to determine the loan amount. Having tax returns in order ensures an accurate representation of income and increases the chances of loan approval.

What is the recommended approach to take when starting to look at properties for investment?

It is recommended to first consult with a lender to understand the price range one can afford, then look at a variety of properties within and slightly above that range to make informed decisions.

Why is it suggested to avoid investing in properties that don't cash flow at least to the point of breaking even?

Properties that don't cash flow or at least break even can lead to financial strain and additional hassle for the investor, which is undesirable.

What type of properties does Graham generally recommend for investment purposes?

Graham recommends single-family residences, duplexes, triplexes, or fourplexes, as they qualify for conventional financing and have the potential for both rental income and resale to owner-users.

What are some factors to consider when determining if a property is a good investment?

Factors include the property's potential cash flow, the condition of the property, the location, and the required renovations to make it appealing to tenants.

How does Graham suggest finding contractors for property renovations?

Graham suggests using word of mouth or platforms like Yelp to find contractors with good reviews, and getting multiple bids to compare costs and services.

What is the importance of being present on site during property renovations?

Being on site daily ensures that the project stays on track, issues are addressed promptly, and the quality of work meets expectations.

What are some tips for renting out a property effectively?

Tips include taking professional-quality photos, responding promptly to inquiries, advertising on multiple platforms, and thoroughly screening potential tenants.

What is the long-term strategy Graham suggests for building a rental property portfolio?

Graham suggests a strategy of gradually acquiring properties, such as a duplex every other year, ensuring each is cash flow positive, and repeating the process to build a substantial portfolio over time.