A well-defined buying process is vital for real estate investing. It reduces risks, avoids costly delays, and facilitates quick property acquisition once a suitable property is found.
Here, I will outline the process I recommend.
Before You Start
Begin by organizing your finances. Specifically, identify the amount of credit and cash necessary to purchase an investment property in your selected market.
For example, this is the cash and credit needed to buy a $350,000 property with a 30% down payment, 2% closing costs, and a $10,000 renovation budget:
- Down payment: $350,000 x 30% = $105,000
- Closing costs: $350,000 x 2% = $7,000
- Renovation: $10,000
- Total acquisition cost: $122,000
- Loan amount: $350,000 x 70% = $245,000
So, in this market, you are not ready to start if you do not have at least $122,000 and a preapproval for $245,000.
Define Your Goal
“If you don’t know where you are going, you’ll end up someplace else.” – Yogi Berra
For most people, the goal is financial freedom. Financial freedom requires a reliable income, which means your rental income continues, even in bad economic times.
There is a common misconception about properties and rent. Real estate never pays rent; the tenant who occupies the property pays the rent. So, income reliability depends on having a reliable tenant, not the property. A reliable tenant stays many years, pays the rent on schedule, and takes good care of the property.
So, instead of purchasing a property based on someone’s opinion, identify a tenant segment with a high proportion of reliable individuals. Determine what and where these tenants currently rent and buy similar properties.
You can identify such a tenant segment through property manager interviews. Simplistically, ask multiple property managers what properties they would buy if they wanted tenants who stayed many years, paid the rent on schedule, and took good care of the property.
In 2005, when setting up our investor business, I asked multiple property managers this question. Most identified the same kinds of properties.
Create a Property Profile
Once you understand what properties attract reliable tenants, create a property profile that describes these properties. A property profile has at least four elements:
- Location: Identify the locations where significant percentages of the target segment currently reside.
- Property type: Determine the type of property these people currently rent, such as condos, high-rises, multifamily homes, or single-family homes.
- Rent range: Determine the amount the segment is willing and able to pay, usually around 30% of their gross monthly household income.
- Configuration: Determine the desired features of the property, such as two bedrooms, a three-car garage, a large backyard, or a single- or two-story home.
Once you have a property profile, you can provide this to any agent, and they can find conforming properties.
However, just matching the housing requirements of your target tenant segment is not sufficient. Here are additional property selection considerations:
- Initial ROI and cash flow
- Purchase price
- Time to rent
- Renovation cost and risk
Knowing your selection criteria before you start will simplify the property selection and evaluation process.
Renovation Considerations
Almost every property needs renovation. How do you determine what to renovate? To understand the process for determining what to renovate, you need to understand the concept of “market-ready.”
A property is considered market-ready when most of your target tenant segment is willing to rent it at market rates. What is market-ready is determined by comparing your property with similar rental properties available in the market at that time. Market-ready has nothing to do with what you like or dislike.
For example, suppose your property goes on the market with laminate kitchen counters. Should you install granite counters? It depends on the competition. If competitive properties also have laminate counters, spending the money to install granite is not a good investment.
Meanwhile, suppose your property comes back on the market in a few years, and the competition has granite counters. Installing granite kitchen counters is now a necessity.
The takeaway is that “market ready” depends on the current competition; market ready is not static.
It Takes a Team
Everything you learn from podcasts, books, seminars, and websites is general information. You will buy a specific property in a specific city, in a specific condition, subject to specific local rules and regulations. The only source for such hyperlocal information is an investment team.
Plus, you will need processes, local resources, and skills to bring a property to market. Try as you might, you cannot replicate the experience and skills of a team of people with years of experience.
If you needed surgery, would you sign up for medical school? No, you would seek a surgeon with expertise in the specific procedure you require. The same is true for real estate investing.
Final Thoughts
Successful investing begins with securing the necessary financial resources. Next, select a location with significant and sustained population growth. Then, identify a tenant segment with a high percentage of reliable people. Determine what kinds of properties these individuals are currently renting and buy similar properties.
Following the steps in this process greatly increases your chances of success. Choosing to go it alone increases your risk, costs more, and takes more time.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
