How to Buy a Rental Property Step-By-Step

1. Credit

Credit is the most important requirement to get a traditional mortgage from any financial institution or credit union. The minimum credit score for a loan tends to be between 580-600. Generally, the higher credit score you have (620+) the better. The higher your score the lower your interest rate will be on a monthly basis. Keep that credit card paid off and make sure you have a solid credit score and report.

2. Down Payment

You MUST save 40% of your gross income every paycheck. Yes, I know! You may have children, rent, utilities, bills, student loans or massive debt. Saving 40% of your income will provide the opportunity to save for your first investment property. The IRS takes 40% of your income. Why would you pay yourself anything less than your willing to give to the government every month? Open a savings account at your local bank or credit union and every month put 40% of your gross income into the account.

3. Get Preapproved

Most banks and credit unions require a source of employment during the qualification process of a loan. Financial institutions must trust that you are fully capable of paying the monthly mortgage. The loan amount a bank will provide generally is 3-4 times the annual income earned from an employment. There are four main finances every financial institution requires including credit, two year work history, down payment and a low debt to income ratio.

4. Build Team

Unless you have experience in running a real estate business, I recommend building a great team of experts who specialize with real estate investing. Many new investors put on all of the hats as the property manager, contractor, project manager, real estate agent etc. This will only lead to stress and eventually you will drain yourself from the amount of responsibilities it takes to run a successful investment business. The fee you will pay for each team member is completely worth the stress and time you would have if you did not commit to building a great team to run your investment business.

5. Make Offers

Make offers on places you feel are a good deal. Know your price, know what it’s worth, and have patience. It is important that you have strict criteria and to avoid deviating from you criteria. Run the numbers on every property you are considering purchasing as an investment. What is the monthly cash flow? What is the cash on cash return? How much equity is in the property? What is the property current value?

6. Due Dilligence

Inspections are the most important part of the due diligence process. A home inspection is a physical examination of the condition of a property. A home inspection is usually completed during the due diligence period before closing day. The inspection of a property provides the buyer leverage against the seller. Most buyers will go back to the seller after a thorough inspection for a credit on the purchase price or request the seller to fix any repair found during the inspection.

7. Close on the property & Renovate

Close on the property. Speak to your lender and get all the information needed to close on closing day. Verify the appraised value to clarify the property is worth what you have under contract.