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

what's up you guys it's Graham here so here's something that everyone wants to know and that is how do you buy your first rental property what do you look for how much money do you need exactly what do you do how do you know if it's a good investment how do you smash the like button which if you guys haven't already hit the like button make sure to smash that like button so this video is really meant to be a step-by-step guide to buying your first rental property and then from there you can continue doing your own research and finding out which property is right for you so with that said let's get right into it okay so we're gonna be starting at the very beginning and before you even think about investing in real estate you're gonna need to do a few things first to prepare so this is step 0 but obviously you're gonna need a down payment to invest in real estate they're typically at the time I'm making this video right now which is at the end of 2018 most lenders want to see about a fifteen to twenty percent down payment anytime you buy real estate that means for every $100,000 you end up buying you're gonna have to put down between fifteen and twenty thousand dollars from your own money now obviously if you're buying something for yourself as a primary residence technically you could put down less technically as little as three to five percent and you just pay the PMI on top of that but I generally recommend putting down a little bit more money just as a bigger safety net and if you're investing in real estate typically lenders are gonna want to see you put more money down not less and ultimately how much money you have saved up or will be saving up is really going to determine whether or not you will be investing in real estate and what you will be buying so obviously if you're watching this right now and you have like three thousand dollars saved up don't expect to go in like buy a two hundred thousand dollar property tomorrow it's not going to happen but in the meantime at least save up learn these strategies and be able to implement them as soon as you do have the money so we're now assuming you're either in the process of saving for a down payment or you already have the down payment step number one is that unless you're buying the property outright in cash which I have a feeling is very few of you you're gonna need to get a loan on the property and in order to do so you're gonna have to work on your credit score that means if your credit score is like five fifty and you only have two credit cards that have both late payments on them and maybe a few counts and collections chances are you got to take care of that first before you even think about investing in real estate now ideally anytime you go and get a mortgage you'll want a credit score above seven hundred preferably above 740 and ideally you want to be above 760 the thing is to get the best rates in a mortgage you're gonna want to have above a 740 credit score above this is the rate that lenders really give you the best rates possible now under that you're seen as a riskier borrower and because of that they charge you more interest and because of that that just means less money in your pocket at the end of every month so this means you're gonna want to have credit to begin with and have a few active lines of credit that you've always paid off on time nothing lates nothing in collections and preferably your score is above a 740 and if that doesn't happen you're really gonna need to take care of that first by making sure that everything is paid off in full that you have no accounts and collections that if you have late payments you either can dispute that you try to get those removed there's a whole bunch of videos on YouTube about how to clean up your credit score it's really not that hard don't go and pay someone to do this you can do it yourself very easily just you YouTube all of this you'll learn a lot just YouTube it and if you don't have any credit to begin with whatsoever I have like seven videos already about how you can get started building your credit I will just link to those in the description or I'll just make like a top post you know what that's I'll do a top post on it so you'll see it down below so step number two I'm now assuming that you have decent credit and have somewhat of a down payment or you're saving for it you will need to have your tax returns in order now anytime a lender looks at your tax returns and tries to give you a loan especially if you're self-employed like me they're gonna look at the last two years of your tax returns and take the average between those two years this means that if you're number one you made $50,000 your number - you made $100,000 the average of that is $75,000 and that is the amount that they will give you a loan on in addition to that they usually want to see anywhere between two months and six months of your bank statements proof of employment proof of income proof of any other liabilities or assets that you have make sure you have all of these in order because they will be asking for it now it's really important that if you're planning to invest in real estate that you don't just deduct everything from your tax returns to avoid paying taxes on it now in the past have been pretty aggressive about deducting as many expenses as possible against my income but when lenders go and look at your tax returns they see the much lower amount that you're reporting that you make after all of your expenses and they loan you just based off the much smaller amount so that means if you think you're all cool because you make $100,000 a year but you write-off $80,000 of that as an expense to lower your tax bill good luck getting a loan on that now prior to getting a property I'll usually go a little bit lighter on my expenses so that way I end up paying more taxes but on the flip side I can qualify for a larger loan which is more important because I'm showing more income so it's very important that you make sure to take care of this and anticipate this in advance so step number 3 is talk to a lender before you do anything otherwise I promise you this is what's going to happen you're going to go out start looking at properties and like the first place you see is going to be absolutely perfect then you're gonna go to the lender and find out that that place is over your price range and you can't afford it and you're gonna be heartbroken but then everything else you see you're going to compare it to the place that you missed out on that you couldn't afford and it's just not going to be a good experience you're not gonna have a good time so instead here's what you're going to do you're going to go to a lender first give them all your paperwork your tax returns your bank statements or everything don't have them run your credit score instead tell them what your credit score is that way they won't have to run it and won't ding your credit you're not gonna have a hard inquiry on your credit report don't do any of that if you have no idea what your credit is I highly recommend you run it on creditkarma.com it's absolutely free I wish they were sponsoring this video Credit Karma if you guys are watching please sponsor me because I'm giving you a ton of free promotion here for real the credit card was great I use it myself creditkarma.com you could sign up for free in like 5 minutes it'll tell you approximately what your credit score is just tell lenders whatever that score is and they'll be able to punch in all the numbers and tell you roughly what you would be able to qualify for now this is so important you do this for a few reasons number one you know from the lender exactly what you could afford so that way you don't waste anyone's time or your time seeing something that's just out of your price range number two if you see something you do really like you've saved a lot of time because you already have all the information in with the lender and they're pretty much ready to go just pending them running your credit know trust me when I say this because this is like over ten years of experience now at this point it happens all the time do you find a spot that's worth buying chances are 10 other people want it just as much as you do so it's so important that you can hit the ground running have all your paperwork ready when it comes to investing in real estate timing is key and the quicker you can act on something generally speaking the better the deal you're gonna get so once you've got that out of the way you've spoken with the lender you figure out exactly what you can qualify for start looking at all the properties on the market this should really be the fun part look at everything you possibly can within your price range and then bump it up about 15% just so you're able to see properties that are a little bit more expensive to compare them to the ones that you're looking at now when it comes to this the more properties you see the better when it comes to me buying real estate I see absolutely everything on the market I will see 25 to 60 places everything in the entire area so that way when I see the right one I know it immediately and once you start seeing more than like 20-25 homes you're gonna know exactly why something is priced the way it is what upgrades are reasonable what upgrades are not reasonable for the area how well something is priced if it's in good condition you're gonna have a really good understanding once you see more than like 20 homes or so know until you've seen a lot of homes in the market you could end up seeing the perfect deal but just not recognize it because you have nothing else to compare it to now some people at this point might recommend looking out-of-state if you live in an area that's very expensive or just doesn't cash flow so this might be a good option depending on your circumstance ideally for me I like buying properties where I get to see what's going on day today I know where people are moving I know where the trends are I know where investment money is going I can see how the area is changing firsthand and because of that I feel like I have an advantage over someone else who doesn't see those things day-to-day now usually when buying out of state it's gonna be a lot harder to notice some of these subtle trends unless you have someone you really trust or can rely on or a really good realtor but even then you take a risk relying on someone else without fully understanding the deal yourself and listen I'm not saying it can't be done because there are many very successful real estate investors that invest out of state I'm just saying it carries its own risks associated with that and you really need to understand exactly what you're buying and investing in now when it comes to me I don't invest in properties on the really low end I don't invest in properties on the really high end for me I go for the median price range if anything like if the median is like this whole range here I usually like to go like lower middle if that makes sense just below like the average price in the area now for me this means I can target the biggest buyer pool possible know just because I'm like lower middle it means there's usually a little bit more room for upside potential for me to fix it up and increase the price and also when it comes to renting out the property it's just more affordable and generally I'm gonna find a lot more tenants who want to live there and also one more thing and I'll call this like step four and a half what type of property should you look for now for me I tend not to look at any condos because they find that there's not a lot of room for upside you can't add square footage there's usually only so much you can do to it and you're at the mercy of the HOA and not to mention the HOA fees usually just eat into your profits now for that reason I usually like single-family residences or duplexes triplexes or for plexes which means two to four units now the reason I like doing this is because you get to qualify for conventional financing which is a lot easier to get the commercial financing once you go over five units that means you usually get a lower interest rates and better interest rate terms and better mortgage terms and not only that but when it comes time to sell if you ever decide to sell in the future you're not only appealing to investors but you can also appeal to owner users so step number five is that you need to determine what the cash flow is and the reality of it is that usually like 95 to 98 percent of properties suck they don't cash flow they're gonna lose money and they're not a good deal to buy it's also a very true reality that everything makes a good investment if you buy it for the right price so it's very important to understand what these numbers are and what to look for know if you're ever looking at a property or an area and you have no idea what it's going to rent for usually what I like to do is look it up on Craigslist calm if you're in Canada it's usually Kijiji calm to be able to find what similar places are asking for rent you can also use websites like Zillow Trulia Redfin look at the area find out what other properties are renting for and then you can face that on the property that you're looking at but anyway going back to this in order to understand cash flow you're gonna first need to understand exactly but the ownership costs are of the property the first thing to consider is how much money are you putting down you then need to consider what your mortgage is going to be and then you need to consider what your interest rate is going to be in the loan terms which I hope is going to be a thirty-year fixed-rate mortgage once you know these things you can plug it in a mortgage calculator for me I like to use the website to mortgage calculator dot-org that's pretty much the one I use for everything so feel free to use the same one as well so as you can see on a four hundred thousand dollar property assuming you put 20% down your monthly payment would be seventeen hundred and seventeen dollars per month from there you're going to need to calculate what your state's property taxes are if you're here in California it's about 1.2 percent of the purchase price which on four hundred thousand is going to be four hundred dollars every single month from there you'll have insurance and for me my properties they're usually between a hundred to one hundred and fifty dollars a month in insurance so we'll tack that on I recommend speaking with your insurance agents just to find out a ballpark number and you can go and use that to use these calculations now from there you're gonna have a lot of other random expenses that come up it could be a gardener random fixes pest control whatever it might be maybe you pay for pool maintenance or whatever you'll have a few other expenses to tack on in addition to this I'll usually just throw in like a $200 a month buffer on that and then you're gonna have vacancy every now and then your tenants are gonna move out and you're gonna have some vacancy and have to fix it up so I'll just hack on another 150 dollars a month on average for that this means that on a four hundred thousand dollar property probably on average it's going to cost you about twenty six hundred dollars every single month that also means in order to make the property cash flow you're gonna have to make more money than that in rent so let's just say for the sake of this example your four hundred dollar property is going to be renting for thirty two hundred dollars every single month that means that you should see about an eight hundred dollar per month cash flow on an $80,000 downpayment investment which works out to be a twelve percent cash on cash return now also in addition to the eight hundred dollars a month that you're getting you're also paying down the loan in the form of principal this means in the first year you're getting an additional forty seven hundred dollars in equity in the property and that brings your total first-year return on an eighty thousand dollar investment to fourteen thousand three hundred dollars and how that's broken down remember is $800 a month which works out to be 9600 dollars of first year in cash flow plus 47 hundred dollars in equity by paying down the loan that works out to be nearly an 18 percent return on your 80 thousand dollar investment and for anyone just starting I never ever recommend buying a property that doesn't cash flow or at the very least worst-case scenario breakeven because the last thing he wants is to be out of pocket to own a property plus all the hassle that comes across event plus all the management you never want to do that make sure the very least it breaks even very least I mean that's just like that should be your worst case scenario is it breaks even and the tenant just pays off your mortgage for you worst case ideally you need to make some cash flow on top of this if you're just starting the more cash flow of the better now when it comes to finding a property that cash flows it's often like finding a needle in a haystack especially here in Los Angeles I have seen probably over a hundred two hundred properties total in the last year and maybe only a handful of those actually cash flows so it's so important to have patience and to really stick with the numbers and know what makes sense to buy and what doesn't make sense to buy and just avoid that and remember that every property will cash flow at the right price so don't be afraid sometimes to make reasonably low offers at a price point where it will cash flow and if the owner says no to that that's fine but every property will cash flow just depending on what price you buy it for now step number six is look for properties that need minor cosmetic renovations this is what I do anytime I end up buying something and this is where I see all the upside ideally you want a home where all the unsexy hidden stuff is redone like roof foundation plumbing electrical all the things you don't see but when you walk into the home it just cosmetically looks a little old maybe it's stuck in the 70s or 80s and maybe there's like 90s carpet everywhere but everything else like functionality-wise is perfect things like old kitchens old bathrooms old floors old paints peeling paint or landscape things like this are really easy to fix in a relatively short amount of time for not usually a ton of money I've seen so many places where if you spend $30,000 fixing it up you could increase the cash flow by six hundred dollars every single month that is a tremendous ROI on your money and when you're just starting out doing all of this chances are you're not going to know which upgrades to do or what's common for the area or how much something is going to cost but trust me the more you end up seeing the better you're gonna get an understanding I need to do these specific renovations and this will get me the best ROI now from there I recommend going and Yelp and finding good contractors to get bids with how much something is going to cost to renovate or remodel I recommend usually getting three bids just look on Yelp for people with like more than four stars read the reviews no not every contractor is going to be perfect but I highly recommend the reviews will tell you if these people are like even decent or not and make sure when you meet with these contractors to ask them as many questions as you possibly can don't think any question is stupid ask them their opinions on things asked how they would recommend doing something again the more opinions you get and the more knowledge you get by meeting with people the better off you're going to be and by the way just expect this to happen because 100 percent will happen every single time for me it happens every renovation you do is going to cost twenty percent more than you think it will and will take twenty percent longer than you think it will just trust me on this so just budget accordingly if they give you a bit of like $20,000 expect it's probably gonna be $24,000 if they tell you it's gonna be done in a month expect it'll probably be done in like a month and a half every single time always turns out this way without exception don't expect anything to be done exactly on time for exactly the price it's rare it's also really important that if you're renovating this place to then rent out to attendants you make it as renter proof as possible which means don't do really nice scratch Bowl hardwood floors do laminate don't do really expensive countertops that could crack or break or stain do like a very durable countertop or like maybe one of those imitation looking stone countertops I've noticed that generally tile floors are pretty much indestructible depending on the area you may want to do tile instead of laminate it really just depends on the area but tile is one of those things that like you can't mess up I also recommend avoiding carpet at all cost because it will get filthy and you're gonna have to replace it after every single tenant and that really adds up over the long run and also don't do anything too expensive because trust me if it can possibly break a tenant will find a way to break it I have no idea how they always break these things but if it's breakable just trust me it's gonna break now the last little thing I want to mention here that I avoid certain properties in certain locations and the first one to keep in mind is that you cannot change location I don't like buying anything that's like right next to a freeway where you just hear the freeway noise I don't like buying anything on a busy street I don't like buying anything if there are two streetlights on the either end because that means that cars usually pass through if there's ever any traffic it's just any sort of street busyness is usually not good I also like to make sure the property I get does not back up to a huge apartment building or huge like commercial building right behind it like a big parking lot or stuff like that all of those things tend to bring down the value this just means that usually in the future it's gonna be a much harder sell there's gonna be less resale value there and there's gonna be less upside than if it didn't have those things now step number seven assuming you found the perfect place you've talked to the lender you get your credit in order your tax returns assuming all of that is really good you can start making offers on properties no just expect that on every offer you make is going to work out and listen I'll be honest with you guys but like I lose out on a lot of offers because I will offer a lower price at a price where it makes sense for me to buy it because the numbers work and if it goes any higher than that it just doesn't make sense for me to buy and it won't buy it I don't get emotional about it I don't take anything personally I literally just look at the numbers and at certain prices things just make sense to buy so I will buy it and I highly recommend when you're doing this to work with a very competent realtor they will know all the ins and outs of the contract they will know the best strategies to negotiate depending on this specific deal they're gonna be able to help you out tremendously if they are a good real estate agent likewise working with a bad real estate agent will make your life a living hell they will lose your deals they will be impossible to reach they will not know what they're doing it's gonna cost you a lot of money if you end up working with a bad real estate agent so in order to find a good real estate agent definitely interview them ideally use word of mouth is one of my favorite ways to meet different real estate agents and that's how I end up getting a lot of my clients but also find out how quickly they respond back to you if you send them a text do they respond immediately or did they get back to you the next day if you try calling them does it take you hours to be able to reach them or do they pick up on the second ring always I honestly see so many Realtors just take days to get back to people and I want they're like how the do these people stay in business it just doesn't make sense to me but more importantly when it comes time to make an offer don't get caught up in the excitement of writing an offer and like competing against all these people and trying to like win and by doing so you end up overpaying for the property but also don't be stubborn enough to miss out on the perfect deal just because you don't want to come up like you know a few thousand dollars or whatever it might be if in a perfect place usually it's worth it to pay a fair price to get the right deals and try to get a steal of a deal for the wrong place I will definitely pay more for quality peace of mind and ease of transaction and I will usually pay a little bit more for a nicer area than going to a lower end area to save some money and dealing with riskier problem prone tenants now step number eight is I'm assuming in step number seven you've had a lot of frustration getting offers accepted you want to pull your hair out maybe you have a few gray hairs coming in I'm assuming now you've got a deal under contract this is your time to do your inspections on the property and make sure it's in decent condition or if it's not you know exactly what's wrong with it now when it comes to doing this inspect as many things as you possibly can and probably like do the roof the electrical the plumbing if there's any mold the foundation the sewer line if it's on a septic tank just you can do radon gas for all I care I mean I don't care what you do just do as many inspections as you possibly can then from those inspections find out how much it's going to cost to fix these issues now keep in mind every single property even the ones in amazing condition will have issues it could be a brand new perfect construction and a guarantee inspections will always uncover something now it's important that when you find these issues tally up how much it's going to cost and then ask the seller for a credit or a price reduction to compensate you for these issues always ask even if they say we're not giving a single dollar it's as is they always say they always say that by the way they always in as is no credit but just ask for something and like literally you have no risk just by asking worst-case they say no and you know that's fine you could decide then but always ask because most of the time your sellers will give you something I usually see inspections as the second round of negotiation because even though you were able to get your offer accepted now you did your inspections and this is your chance to bring down the price a little bit more if you're the buyer now step number nine is that during the escrow process you're gonna have to understand exactly what the right now I have a very detailed video of this so I don't make this video like just 20 minutes long and step number 9 so anyway I will link to that in the description but generally speaking you're gonna have escrow cost you're gonna have closing cost lender fees different miscellaneous fees a lot of things like this usually on average it's about 1% of whatever the purchase price is of your property this means on a four hundred thousand dollar property chances are it's gonna be around four thousand dollars for all of those fees that's in addition to your purchase price but like I said I will just put a link to the whole video in the description so basically just click the link in the description for like a continuation on the section I spent forever on that video so anyway check that out know step number ten and this is also some of the fun part is renovated now if you bought a property that doesn't need any renovations just go and skip this part now usually when I start a project I started as soon as possible as like the day I closed escrow so I avoid having any down time on the property so I can get it rented out sooner now like I mentioned earlier most of my contractors I found through word of mouth or on Yelp and they have been fantastic now the one thing when it comes to renovating a property is that you always need to be on site preferably every single day I don't care if it's a minor renovation if you're doing a bathroom a kitchen during the whole place I don't care if you're spending five grand or fifty million dollars it doesn't matter you're really gonna want to be at the property every single day to supervise because I promise you things will not go as plans and they promise you things will come up and I promise you they will do something wrong and if you weren't there you would notice these things one of the advantages to of being on the site every single day at least in the morning or showing up like random times is that you get to make sure the project is going to stay on time a lot of times I've shown up to projects at like 2:00 in the afternoon and no one's there or there's like one person working when there should have been like five or six and then you have to call the contractor be like where is everybody why aren't they here and they move them around draw up sites so the contractor will over book and then move them to whoever complains the most and whoever's job is most important they generally move those people there so like unless you're there every single day and you have to tell them like gotta finish gotta finish gotta finish got to stay on track it's just gonna drag on so now step number eleven is assuming all the renovations are done now you get to rent out the property and this should also be the fun part of finishing up this whole process now the number one thing you need to do when renting at a property take really good pictures so many landlords like I mentioned earlier don't do this they sit around with their iPhone they just take like really pictures of like the bathroom that are all like blurry and on it like no wonder they can't get top dollar for the place I highly recommend you pay for professional pictures that are gonna make your property look amazing I don't care if you're renting it out for like six hundred bucks a month or ten grand a month get really good pictures also make sure that if anyone contacts you to show it that you respond back to them immediately because usually when these renters are looking they're in the moment they want to see it right then in there and they're all excited about it if it ends up taking you a few days to get back to these people usually they would have just found something else you don't want to miss out on this and especially if you're trying to rent it out for top dollar just it's so easy just pick up your phone and get back to people and be able to show it as soon as they want to see it now as far as advertising it online I personally like to use Craigslist apartments comm Zillow Trulia red fin and then I'd list it myself as an agent on the MLS and it's indicates to everything else I put it on as many web sites as possible because you really have no idea where someone's gonna be looking and you don't want to just isolate all the other websites because you like just using Craigslist for instance so you use them all and also when it comes to tenant screening I have another video on that so again this whole section doesn't be like 20 minutes so I'm just gonna link to that again in the description just use that video for like tenant screening and all this sort of stuff and so I can skip past all about here just check out the video in the description all right so finally step number 12 and this is where it gets really good is that now you get to start scaling up over time I highly recommend you keep the rental property the property you bought for about a year to eighteen months or so get accustomed to it get some good renters in there understand what you're doing and then start saving up for another down payment to go and do this again at this point it's pretty much just rinse and repeat and the more deals you do the better you're gonna get at this the better you're gonna get at picking renovations the better you're gonna get at finding the good deals so your first one is usually going to be a learning experience and then from there you're just gonna get better and better and better and better now this definitely is not going to turn into a multi-million dollar empire overnight that's unrealistic but I think it's absolutely achievable over the next decade to maybe fifteen years or so you can absolutely achieve that just imagine if you end up buying a duplex every other year that's all you got to do is just buy a duplex every other year rent it out make sure it's cash flow positive go and do that two years later go and do that two years later within ten years you're gonna have ten units five duplexes they're all gonna be cash flowing all paying for themselves and after 30 years all of those are gonna be paid off imagine having five places all paid off after 30 years that are all cash flowing that is gonna be a hell of a good retirement and that is just a 10-year strategy that you can implement basically like now just start getting this process done now and that way over the next ten years you'll build everything up let it run for the following 20 years have them paid off and you're gonna be sitting back on so much cash you're not going to know what to do with it so hopefully you will end up buying a Lamborghini so you'll probably have to comment comment what color your Lamborghini is going to be down below when you get all these places cash flowing firstly for me it would be Verdi typica you know is always been my favorite Lambo color since I was like 14 years old so anyway with that said you guys thank you so much for watching if you guys enjoyed this make sure to smash the like button make sure to subscribe if you want to see more real estate videos more real estate investing videos more unboxing credit card videos all that great stuff make sure to subscribe also feel free to add me on snapchat and Instagram posts are pretty much daily so if you want to be a part of their feel free to add me there private Facebook group in the description as well for anyone who's interested in real estate add yourself to that thank you again for watching and until next time

Channel: Graham Stephan

Views: 2,977,986

Rating: 4.9519725 out of 5

Keywords: how to buy your first rental property, how to invest in real estate, how to invest in real estate 2019, how to invest in real estate 101, investing in real estate, real estate investing strategies, real estate investing 2019, real estate investing for beginners, real estate investing with no money, real estate investing 101, real estate investing podcast, real estate investing audiobook, real estate agent, real estate mentor, real estate millionaire, how to invest in 2019

Id: bJx7_1rWC6U

Length: 27min 44sec (1664 seconds)

Published: Mon Nov 19 2018