While they are often more easily managed than multifamily units, single family rental houses still rise in value fairly quickly and offer many possible financing and purchasing possibilities.
Nevertheless, for most people, buying a single family home is not only challenging, but can be downright confusing.
Enter your esteemed author who, today, will help pull back the curtains and expose the process of buying a single family home in seven important steps. Think of this article like a recipe, a list of directions and suggestions for you in your future rental search and purchase.
So, without further ado, the seven most important steps to buying a single family rental home are…
There are SO many single family homes out there, and before you decide which ones will become your future rental properties, you need to narrow down that list a bit.
For our purposes, we’ll divide research into two distinct categories.
Category 1: Education. Essentially, prospective rental owners need to do this kind of research to make sure they know what they are doing. How does the rental market look in your area? What are average monthly rental prices for 2, 3, or 4 bedroom homes? Listen to podcasts, watch webinars, read articles and books. Become an expert in your preferred rental type, and be aware of any market niches you could potentially exploit.
Category 2: Location. Now that you know “what” you want to buy, you need to find out “where” you want to buy it. Researching market prices and how they relate to location and local amenities will further narrow your list of prospective properties.
While I sincerely wish I could tell you the exact type of property to buy, and the best place to buy it, I can’t!
Why? Because I don’t know you! That’s why it’s up to you to get out there and find answers by yourself. Doing so will put you miles ahead of so many other aspiring rental owners, who go in blind.
In the end, your specific goals are what will make an investment perfect.
But how do you know what your goals are?
Regardless, you need to research before you look to buy. But, assuming you’re already well versed in local markets and trends, and you’ve achieved a level of self-reflection unmatched by any mortal man, next you’ll need to…
Think of real estate investing as a pyramid.
While there are many, and I mean MANY properties at the base of the pyramid, properties you could see yourself purchasing, this pool of possibilities gets smaller and smaller as you define your wants and needs, until you purchase the one property at the top.
For now, let’s stick to procuring leads and building that pyramid base.
Leads on potential properties can be procured from many sources. But some of the most common places are:
Honestly, don’t worry about how you’re getting leads, just make sure that you’re getting them. For beginners, I recommend that you start with a good real estate agent, who can vet listings for you and forward properties that meet your expectations. Agents can also set you up with automatic notifications that alert you when a home that meets your unique criteria hits the market.
So, now that you have your leads, let’s do something with them. Time to get geeky…
Now is when you decide whether potential properties are good investments that will further your goals.
To delineate between good and bad investments, we have to determine the monthly cash flow (and return on investment) for each property.
Cash flow is what you make in profit each year or month AFTER all the expenses associated with owning and renting are paid in full. Sure, you say, seems simple enough. Let me just break out my cell phone calculator. But it’s not always so easy to figure out.
For example, let’s say you can rent a single family home for $2000 per month.
And, for this same property, let’s say that the monthly mortgage, including insurance and taxes, is $1500.
So, how much would you say your monthly cash flow is?
Easy! You say, $500 sweet, sweet cajones. If only it were so simple.
Because, while your mortgage, taxes, and insurance may be the easiest costs to track on a monthly basis, they’re not the ONLY costs. Far from it.
When calculating cash flow, you HAVE to include ALL of the following:
Fortunately, several of these things will probably be footed by your renter (based on your location and current renting market).
For example, in my neighborhood, the tenant is in charge of utilities like water, sewage, gas, and electricity, as well as garbage, recycling, and sometimes lawn care
Once you get a feel for it, you can run all of these possible costs on your own using a spreadsheet. But, the most important thing is making sure that ALL potential income and expenses are on that spreadsheet and included in your cost-benefit analysis.
After running all these numbers, you’ll be full prepared to move forward, and will know how much you’re willing to put down on a property. Now it’s time to make a deal (dramatic theme music plays).
Do you remember the awkward pyramid metaphor I beat to death earlier?
(The more leads you find, the more deals you’ll calculate, the more offers you’ll make, the more properties you’ll purchase)
Well, it’s time to step up to the next level of the pyramid and make an offer.
As my go to expert on rental properties, Michael Jordan, once said, you miss one hundred percent of the offers you don’t make.
Putting an offer on the table for the first time is scary, but trust me – it gets easier every time. I make dozens of offers a year, and now, I rarely dwell on it for more than five minutes.
It becomes just another day at the office. It’s just another part of the job.
But HOW you make an offer depends a lot on HOW you located the potential property.
I’ll prove it to you. If you found the home over through the MLS, then, as a requirement, you’ll have to make the offer through a real estate agent.
But, if you are dealing with a private seller who is unrepresented by an agent, then you probably won’t use an agent on your end either. Instead, you’ll make your initial offer directly, and probably verbally, to them. While eventually you’ll need to make the offer official with a Purchase and Sale Agreement, these first steps and initial negotiations will be much less formal.
And there will be some negotiating, but it doesn’t have to be intimidating. The important thing is to know what you want and what they want, and (hopefully) those two will overlap a bit!
While it never hurts to ask, you’re probably not getting the property for free.
It seems like common sense, but many rental investors begin the property buying process without a clear idea of how they will eventually pay for their investments. While there’s some honesty to the adage “if you find a great deal, the money will find you,” it’s up to you to make it happen! So go get those funds!
And, I know what you’re thinking, hey, but this is step 5, you’re the one who told me to do all that other stuff first. And, you’re right, I did, but I was wrong. In actuality, it’s probably best to start thinking about financing during step one, when you’re researching your goals and location.
You can’t start making offers if you don’t first have a good idea of how you’ll be paying the amounts you’re writing down!
Fortunately, when buying a single family rental home, you have several financing options at your disposal:
As with every other step in this recipe, determining the best way to finance your single family home is largely dependent on your personal goals, needs, and desires.
In any case, explore all these options to determine which is best based on your goals, available capital, and preferred investment model.
The final step has arrived, it’s time for you to sign that check and buy that house.
Should be easy, right? Even this part has its twists and turns.
But, if you want to be a successful real estate investor, you need to learn to close the deal no matter what it takes. You may even have to consult a lawyer before money or keys change hands.
Closing the deal is about seeking solutions to last minute problems and getting across that finish line. And you can do it!
Now you’ve got a different race to run.
Correct and responsible property management is the final, and perhaps most important, step in your rental house acquisition cookbook.
After all, if you neglect step 7, all that effort you put in during steps 1 through 6 will have all been for naught.
And, you still have choices to make:
There’s no “best choice” here, there’s only a “best choice for you”. Consider how much you value your time, and what relevant skills you have. Will you be able to effectively manage a rental home? Will you have the guts to say “no” when you need to? Will you be firm? Fair? A manager must have all these capabilities, so if you don’t feel you’re capable, find someone who is!
And, even if you do chose to go with a professional property management service, it doesn’t mean that you’ll never have to work or worry over your property again.
Because, in all honesty, your property manager may just suck.
You’ll need to keep them accountable and make sure that their service is up to your high standards. If not, you may end up paying $1500 to a contractor for a couple screws in a wall.