Real Estate

Advice for a smooth buying process (from an experienced real estate investor)

A well-planned buying process is crucial for real estate investing. It reduces risks, avoids costly delays, and facilitates quick property acquisition when a suitable property is found.

Here, I will outline the process I recommend.

Before you begin

Start by organizing your finances. Specifically, identify the credit and cash necessary to purchase an investment property in your chosen market.

For example, here’s the cash and credit to buy a $350,000 property with a 30% down payment, 2% closing costs, and a $10,000 renovation budget:

  • Leverage: $350,000 x 30% = $105,000
  • Closing Costs: $350,000 x 2% = $7,000
  • renovation: $10,000
  • Total Acquisition Cost: $122,000
  • Loan Amount: $350,000 x 70% = $245,000

So, in this market, you’re not ready to start if you don’t have a pre-approval of at least $122,000 and $245,000.

Define your purpose.

“If you don’t know where you’re going, you’ll go somewhere else.” – Yogi Berra

For most people, the goal is financial independence. Financial independence requires a reliable income, which means your rental income continues, even in bad economic times.

There is a common misconception about property and rent. Real estate never pays rent; The tenant who occupies the property pays the rent. Therefore, the reliability of the income depends on being a reliable tenant, not the property. A reliable tenant stays for many years, pays rent on schedule, and takes good care of the property.

So, instead of buying a property based on someone’s opinion, identify a tenant segment with a high proportion of trustworthy people. Determine what and where these tenants currently rent and shop for similar properties.

You can identify such a tenant segment through property manager interviews. Simply, ask several property managers what properties they would buy if they wanted tenants who would stay for many years, pay regular rent, and take good care of the property.

In 2005, when setting up my investment business, I asked a number of property managers this question. Most identified the same type of characteristics.

Create a property profile

Once you understand what features attract reliable tenants, create a property profile that describes those features. A property profile consists of at least four elements:

  1. Location: Identify locations where a significant percentage of the target segment currently resides.
  2. Nature of Property: Determine the type of property these people currently rent, such as a condo, high-rise, multi-family home, or single-family home.
  3. Rent Range: Determine the amount the segment is willing and able to pay, usually around 30% of their gross monthly household income.
  4. Order: Determine the desired features of the property, such as two bedrooms, a three-car garage, a large backyard, or a one- or two-story home.

Once you have a property profile, you can provide it to any agent, and they can find suitable properties.

However, simply meeting the housing needs of your target tenant segment is not enough. Here are additional property selection considerations:

  • Initial ROI and Cash Flow
  • Purchase price
  • Time to rent
  • Renovation cost and risk

Knowing your selection criteria before you start will make the property selection and evaluation process easier.

Renovation considerations

Almost every property needs renovation. How do you decide what to renew? To understand the process of determining what to renovate, you need to understand the concept of “market-ready.”

A property is considered market-ready when the majority of your target tenant segment is willing to rent it at market rates. What is market-ready is determined by comparing your property to rental properties currently available on the market. Market Ready has nothing to do with your likes or dislikes.

For example, suppose your property goes on the market with laminate kitchen counters. Should you install granite counters? It depends on the competition. If competing properties also have laminate counters, spending money to install granite is not a good investment.

Meanwhile, let’s say your property comes back on the market in a few years, and the competition has granite counters. Installing granite kitchen counters is now a necessity.

The advantage is that “market ready” depends on the current competition. The market is not static.

It takes a team.

Everything you learn from podcasts, books, seminars and websites is general knowledge. You will buy a specific property in a specific city, in a specific condition, with specific local rules and regulations. The only source of such hyperlocal information is the investment team.

In addition, you will need the process, local resources and expertise to market a property. Try as you might, you cannot replicate the experience and skills of a team of people with years of experience.

Would you sign up for medical school if you needed surgery? no. The same goes for real estate investing.

Final thoughts

Successful investing begins with acquiring the necessary financial resources. Next, choose a location with significant and sustainable population growth. Then, identify the tenant segment with the highest percentage of trustworthy individuals. Determine what types of properties these people are currently renting and buy similar properties.

Following the steps in this process greatly increases your chances of success. Choosing to go it alone increases your risk, costs more, and takes longer.

Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; Ask questions and get answers from our community of +2 million members. connect with investor-friendly agents; and much more.

Note via BiggerPockets: These are the opinions expressed by the author and do not necessarily represent the opinions of BiggerPockets.

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