Checklist of Purchasing Rental Properties

Thinking about purchasing rental property?  Below is the checklist I created when I started out.  Its a lot of hard work building up rental property.  The list below will help make the process a little easier.

1.       Built relationships.  Rome wasn’t built in a day and it certainly wasn’t built by one person.  Building relationships and the ability to network is a critical skill.  PERIOD.  In addition to my banker, I also have a top notch realtor, property manager, tax accountant and financial advisor.

3.       Talked to the Insurance Company.  Let them know your plan.  Get them on board.  When I would make a purchase I knew exatly what information they would need and forms to fill out.  It made the process run smoothly.

2.       Pre-Approved financing.  I can’t emphasize this enough.  This is critical.  Initially, I was rejected by every bank because I “did not have a job”.  Temp jobs do not count as employment.  In fact when my banker submitted my paperwork, I was rejected there too.  My banker went to the head of the loan department and pleaded my case, explaining that even though I did not fit the loan criteria, I was still a good risk.  Six months later,  I was preapproved.  Without this critical piece, I would not have been able to accomplish all I have to date.

3.       Did homework.  Read.  I read every real estate book I could get my hands on.  I talked to people who accomplished what I wanted to do and learn from their experiences.  My realtor and I visited rent friendly neighborhoods and properties to see what made the most sense.

4.       Managed the risk.  Know that things will go wrong.  Make sure you have the money to cover any expenses that come with owning rental property.  For example, 2 of the properties I purchased needed new roofs.  So I know I need to earmark some cash to cover that expense when the time comes.  Click here to see a started list of questions to ask your self.

5.       Worked the numbers.  Buying property should never be emotional, it’s all about the numbers.  Be prepared to walk away.  Here are a few calculations/guidelines I have used:

a.       Gross Yield = annual rental income / purchase price (Gross Yield should be 10% or greater to be considered a good/great deal.)

b.      1% Rule: Monthly rent should be AT LEAST 1% of the purchase price. (Example: $100k PP = $1,000/monthly rent)

c.       15-year mortgage guideline (Rule: Rent should cover monthly payments on a 15 year fixed mortgage, insurance, taxes.)

d.      Purchase Price = the price paid for the property + repairs to be completed before renting.

If the numbers work out then put your bid in.  All cash or preapproved loans are the best leverage.

In short, leverage what you can.  Get preapproved.  If possible, pay cash for the initial buy then take out a loan for 80% of the purchase price.  If you can’t pay cash then preapproval is the next best thing.  That’s it!  It’s a lot of hard work.  I lost many a property but in the end I achieved my goal.  You can too, if this is what you really want.

My property manager takes over from here.  They do all the heavy lifting from advertising to screening candidates, collecting the rest and coordinating repairs.  For me its peace of mind.  But if you are experienced in handling these different areas and can manage the properties on your own, it’s a great savings.  Just have to determine what is more valuable time or money.

Have I convinced you to move forward? Or find alternate investments?  I look forward to hearing from you.