If you are reading this, I will assume that you have at least some interest in buying investment rental homes! Or you may be like me- you love real estate and passive income. You consume every article, blog post, podcast, and post on social media on the topic. If you are that person let me be honest with you and say: you, my friend, are addicted! Lol. Which, by the way, is ok in my book. This post is the beginning of a long series of posts on buying single family investment properties. How you get to your first one will vary, but at the end of the day, the property will be rented to tenants. Not for free to your friends or family…!
I have been in business now for 11 years and I have come across thousands of people in that span of time that would like to buy their first or next rental property. They come to me from different socioeconomic backgrounds, ethnicities, upbringings, belief systems about money and investments. What they do share in common is the lack of focus, and they always ask slightly different variations of the same question along the lines of:
- Where do I start?
- I inherited a home from a family member. What do I do now or how do I buy the next one?
- What market should I buy in first?
- Should I buy out of state or where I live?
- I have ‘X’ amount of money saved / 401K / retirement account and I would like to invest in Real Estate. What should I do?
- I would like to own 20 properties in the next 10 years and retire, move to Mexico, and live at the beach….how do I do it?
The list goes on, but you get the point! My answer often has more questions than answers, but the message is always the same, “Start at the beginning!”
The acronym below will answer the questions above and help you: 1) Make sense of what information comes first, and 2) How to move forward.
LPMAMA: LOCATION | PRICE | MOTIVATION | AGENT | MORTGAGE | APPOINTMENT
Usually I do go in sequence, but this time I will take them out of sequence in order of priority. Trust me, it will make sense! By the way, when have you ever trusted someone that started their sentence by saying, “trust me?” 🙂
There are a lot of moving parts when it comes to buying your first or next rental property. The reason why getting a word-of-mouth referral for a Real Estate advisor is extremely important (and your first step), is because a really great agent will not only have all the missing pieces from LPMAMA, they will also guide you in finding these in a timely manner. Any professional reading this blog post knows that when it comes to your profession or craft, you always improve with time. Once you become an expert in your field, you move from a chaotic mess to a systems-driven, process-guided, simple-to-follow ninja. It usually takes 5 to 10 years to become an expert, and once you do, you will know how to be proactive and what pieces of the puzzle someone needs to be successful. And guess what- great people flock together! So, you know that if you find a successful, experienced, knowledgeable, honest, and ethical Real Estate advisor, they in turn will only want to work with people that match their passion and work ethic! Look at reviews online, ask friends and family for referrals, or look on social media to see who stands out and is consistent with their content. When it comes to investment property, an agent can be the difference between a good deal or a bad deal (or 10K to over $100K gain or loss.) Who you work with matters! And this goes hand in hand with APPOINTMENT in the acronym above. Make an appointment with a Real Estate advisor and use LPMAMA to guide your conversation. An investor friendly agent that knows investment homes as well as has experience with buying and managing investment homes. They will already have this process in their arsenal so you won’t have to pressure them to use this, as you will be preaching to the choir!
The next professional you’re going to need will be a Lender. The information here is similar to that of speaking with a Real Estate agent/advisor. The Real Estate agent you spoke with has already worked with many great lenders and will be able to put you in contact with someone that knows the business, has years of experience, and is someone that you can trust. The most important part here is for you to get a ‘pre-approval!’ Remember that you are buying an investment property, so the lending rules and parameters will be slightly different from those when buying a primary home! (More to come on that in future blog posts.) There are many strategies you can use to initially pay much less for a down payment than the standard 20% to 25% investors have to pay to buy an investment. You want to know your buying power and once you do, you can start looking at location and price range, for example, and why I switched the sequence in this explanation of the acronym.
A lot of people may think that the next item to talk about in order of priority would be location…. but I would say, ‘NO!’ The reason why I believe that MOTIVATION is more important to know now, is because you have to know why you are buying what you are buying. Are you buying to gain equity in the short term and buy somewhere you know you will get very high, rapid appreciation to then sell and buy for cash flow? Or vice versa? This may sound complicated to you, but as you continue to follow me on this blog post journey, YouTube or Instagram (@FitRealtor_ ), everything will start making more sense. You will understand why making a plan early on will enable you to strategize and grow much faster than just buying properties and hoping for the best! The good thing is that the simple act of buying a rental property that cash flows will make it a good investment over time, but planning ahead will make your investment go from ‘good to great!’ The point here is for you to answer these questions:
- What is motivating you to buy rental property?
- What is the ultimate goal for you?
- Are you mainly looking for Cash Flow or Appreciation?
(We can discuss later what other people’s motivation is. Not that you should care about other people’s motivation, but sometimes, when you are new at something, you do not know what you don’t know and it helps to understand other people’s point of view.) For example, our motivation is passive income. We have seen many Real Estate agents in our industry make a lot of money every year and end up having to work into their late 60’s and 70’s because they did not put things in place in the investment world to create passive income for themselves. In other words, create the option of working or not working later in life. I love what I do, but I also like the freedom of choosing and time! Having the option to travel at leisure or taking the weekends off whenever I want to BBQ with family or go the beach sounds great to me!
Our immediate goal is to have $10K in passive income from rental properties in the next 5 years! Next year, in 2023, we could be positioned to reach $2K passively. Three years ago, we did not have that option, so for us, that is huge! Ten years ago, I was making $2500 per month when I was a personal trainer, so the fact that Real Estate has enabled me to potentially make almost that amount passively is amazing and I am grateful to be here!
By this time, you are now pre-approved and know your max buying power! You do not have to buy to your max at all, and the suggestion is for you to pay attention to the full payment (PITI) to see what you feel comfortable with. You also have to check out the different areas in your city or state where that price point will make sense. For example, here in San Gabriel Valley, CA , if you are pre-approved for $400K it is unlikely and unrealistic for you to look for single family homes in Pasadena, Altadena, Claremont and honestly, any other city here…Based on that pre-approval, you will have to either buy a condo or townhome. You may have to go further east toward San Bernardino or north toward Palmdale. Or even further to Fresno…you get the point. Shopping without a pre-approval is never suggested. As a professional Realtor, I would never go shopping with any client that does not know how much they can afford. Shoot, I wouldn’t even go to Target with you if you didn’t know how much you have in your wallet, let alone buy an investment home…!
Yay! Finally, we get to the location. Keep in mind this is the beginning of your journey in buying rental homes. We will not get into the demographics, job market, tenant pool, or city economics on here. What we are simply talking about for now is this:
- What cities or zip codes do you like that have properties in your pre-approval price range?
Based on that:
- What locations have higher rental rates for the asset (property) you want to purchase compared to the price? Will you break even, lose money, or cash flow positively? Start to identify 1 to 3 cities you like, and 1 to 3 zip codes in these cities. You want to start recognizing price points, price per square foot, and rental rates for 1 bedroom, 2 bedroom, and 3 bedroom homes. Know the numbers and the hyper locations of the towns you will be buying in!
As you can see, we said that this would be a simple and foundational initial blog post. And even in this post, there is a lot of content to digest and think about! I am confident that if you follow this sequence, you will be better prepared to move forward with the right Realtor! By the way, you can always message us for a Realtor referral anywhere in the US! We know great Real Estate advisors in every state and of course, we are ready to help anyone in our neck of the woods. We are never too busy for your referrals to friends or family that are also thinking of buying their next investment rental property! Do you know anyone else in your circle that could benefit from reading this blog post? Share it with them. Thank you for reading. @FitRealtor_