A person handing over another person a set of keys over a desk with paperwork.

How to Buy Rental Properties in 9 Steps

Editor’s Note: This post was originally published in November 2019 and has been completely revamped and updated for accuracy and comprehensiveness.

Buying a rental property sounds straightforward, but doing so correctly—and getting a good deal on something you will want to own for the foreseeable future—is a bit more of a challenge. This is especially true if you’re embarking on a buy-and-hold strategy and want to learn how to buy your first rental property without making any mistakes real estate investors can often make.

Here we'll focus predominantly on single-family houses. Still, the lessons on buying a single-family home are similar to those on purchasing a rental property of any type, with just a few noteworthy differences.

Step 1: Pick an area and type

First and foremost, before you figure out how to start buying a rental property, you will need to decide what type of property you want to invest in and in what neighborhoods. Some of the points to consider are:

  • Price range of homes
  • Rent price ranges
  • Rent/cost ratio
  • Quality of area
  • Quality of school district
  • Crime level
  • Distance from your own residence

Much of this involves deciding what level of risk you are willing to accept. I would highly advise against a new investor buying rentals in rundown areas with bad schools and a higher crime rate.

Sure, good tenants are in such places, and you can make money, but it isn't easy. I recommend that only seasoned investors who specialize in such areas try investing in rentals there.

Regarding the rent/cost ratio, most rentals will only cash flow if the rent/cost ratio (monthly rent divided by the total cost of the property) is over one percent. That being said, this rule is, at best, a "rule of thumb" and should be used carefully.

Properties in more expensive areas can dip a bit below one percent. And if you are investing in multifamily or commercial properties, you should use a cap rate instead.

Below are some free websites that can help you figure out a lot of this information about various neighborhoods.

  • City-Data.com offers crime rates and other demographic information.
  • GreatSchools.org is a quality resource for ratings and reviews of area schools.
  • Rentometer.com is an excellent place to start for rental prices, but you can also find nearby comparables on Craigslist.org using its map feature.
  • Zillow.com and Trulia.com are solid alternatives to the MLS, which is considered the best source for sales comparisons for those who are not agents.

Step 2: Decide how to source deals

There are many ways to find potential properties, which we will only be able to touch on here briefly. To summarize your options, here's a list of some ideas to consider:

  • Use a buyer’s agent
  • Get your real estate license and search the MLS
  • Search Craigslist, Trulia, and other FSBO (For Sale By Owner) sites
  • Network with wholesalers who can send you potential deals
  • Direct-to-seller marketing (letters, postcards, etc.)
  • SEO—use a website and improve its search engine rankings to drive traffic from potential sellers
  • Online advertising (i.e., Facebook Marketplace, etc.)
  • Lawn signs 
  • Paid advertisements
  • Buying probate leads
  • Buying foreclosure auctions
  • Buying tax foreclosure auctions

In today's market, finding good deals on the MLS (those listed with a real estate agent) isn't easy. Even still, a few slip through the cracks. If you would like to take a more passive approach, finding a property here or there with a real estate agent may be worthwhile. This would allow you to skip setting up a marketing system or anything like that.

On the other hand, if you want to learn how to purchase a rental property at a sizable discount and make investing in real estate a career, you will probably need to focus on more direct methods, like direct-to-seller marketing and perhaps SEO or online advertising.

Some good lists of potential sellers who are likely to be motivated and who would make sense to market to include:

  • Out-of-state absentee owners
  • Owners being foreclosed on
  • Properties in disrepair
  • Properties on a "dangerous buildings list"
  • Landlords currently evicting a tenant

You can find many of the lists above on websites such as ListSource.com or CoreLogic.com, which are relatively cheap.  Many sites can also help you market for those deals, such as YellowLetters.com or BallPointMarketing.com. Or you can just take the lists, use mail merge, and print the letters out yourself.

Buying a rental property at auctions can be challenging. Often, you will have to provide the total payment amount of the purchase up front (it depends on the county).

In addition, tax liens are not wiped out by auction, so you must be very careful if you go this route. Indeed, I would only recommend more experienced investors take on the auctions.

Step 3: Value the deal

Again, the best tool for valuation is the MLS, but only real estate agents can access that. You may want to consider getting your license, but if you don't, there are other sites you can use to value a rental property without the MLS. In addition, you can request a CMA (Comparative Market Analysis) from a real estate agent on a property you are looking at, which is a breakdown of comparable sales nearby.

When you value a property, the goal should be to find the most similar houses sold and then adjust their prices based on any differences with the property you are looking at (the subject property). Thereby, you want to find houses that have:

  • The same number of bedrooms (plus/minus one at the most)
  • The same number of bathrooms (plus/minus a half bathroom at most)
  • Same subdivision (one mile away at the most)
  • Sold in the last six months (one year at the most)
  • Built within 10 years of each other (20 at the most)
  • No more than 10% bigger or smaller (20% at the most)

You want the comparables to have (or not have) a garage or basement, be on a similar-sized lot, and, of course, be in a similar condition.

Sometimes you won't have such comparables, so you have to use less ideal comparables (i.e., further away, substantially bigger, etc.). That's OK – just remember that in such cases, you can't be as confident in your valuation and, thereby, need to be more careful.

If a comparable is better than yours (say it has an extra half-bathroom), then you would reduce the price it sold to make up for the fact that it is slightly better than your subject house. Remember, you are trying to make them "identical." Of course, it's a bit subjective how much to reduce the price, but by comparing your subject to several comparable sales, you can get a decent idea of what it should be worth.

Step 4: Negotiate the deal

Negotiating is a broad topic in and of itself, and it's important to remember two key things that will put you ahead of 90 percent of the rest:

  1. Ask for what you want
  2. Always be willing to walk away

There's much more to negotiating than that, but it's a good start to keep you grounded. Indeed, one common saying in real estate is that "if you're not embarrassed by your first offer, you're offering too much." That may be a bit of an exaggeration, but it's a good thought to keep in mind.

The last point is always to be respectful to the seller. Don't think someone is rejecting you just because they rejected your offer. Many times in real estate investment, a deal will appear dead, but after a month, the seller will come back to you and be much more willing to negotiate. So always be kind and respectful as well as open and honest when negotiating.

Step 5: Due diligence

It's absolutely critical to never skimp on due diligence. With all sorts of little details to go over, it's a vital step. If you get a property under contract, you should read much more about due diligence to ensure you check every box and don't miss anything that could cost you a lot of money down the road.

In brief, you should always close with a title company and walk every unit (whether it's 1 or 100). It's also best to ask for every lease, rent ledger, operating statement, and proof of deposit for the last month or two (deposit receipts, bank statements, etc.) for any rented property.

You should also get a professional inspection (especially if you are new) and special inspections if the property warrants it (pest and dry rot, phase one for environmental on commercial properties, etc.).

If you find something, don't hesitate to renegotiate the price or back out (remember the second rule of negotiating). If not, you're ready to close, as long as you have financing.

Step 6: Finance

Up front, there are several ways to finance a property. Of course, you could buy it in cash if you have the money. You could also get a DSCR loan, also known as a rental investment loan or rental loan, with an institution such as Kiavi.

Another idea for investors who don't have a lot of capital is to use an FHA loan. These are only good for homeowners in their primary property, but you can buy any residential real estate, up to a fourplex, so you can live in one unit and rent out the others.

You can also partner with someone who has money or use private lenders if you find someone to lend to you for a return of between eight and ten percent.

Finally, suppose you intend to use a loan. In that case, it's important to get a preapproval letter before making any offers, as many buyers will want to see those before accepting an offer.

Step 7: Renovation

Renovation is where most real estate investments go sideways. Before you make an offer, you should always put together a brief estimate of what you think the renovation expenses will be.

I also recommend padding that with a 10–20% contingency for anything you missed—don't forget to include soft costs in your rehab estimate. If you're not sure, don't hesitate to ask another real estate investor or contractor to at least give you a ballpark—just make sure to offer them lunch.

Once you have a property under contract, put together a detailed Scope of Work, separating each line item. Then you want to get contractor bids and start lining up the work. Make sure to get several offers and look for contractors with quality references. If a contractor you've hired is taking too long and not responsive, don't be afraid to let them go and move on to another.

Just remember, renovations almost always take longer and costs more than you think. I've never heard of a single real estate investor complaining about how they were always budgeting too much for their rehabs!

Step 8: Property management

For property management, you can either manage the property yourself or hire a property manager. If you hire a property manager, ask for referrals and interview them carefully. Just like with contractors, if they aren't getting the job done (and unfortunately, many don't), move on to the next.

If you choose to manage your properties independently, you must learn the law and find a real estate attorney. Most of it is common sense, but you'll want to find the landlord-tenant law for your state and familiarize yourself with it closely.

You'll also need to obtain a list of contractors you can call for maintenance and emergencies. There are now many companies specializing in maintenance for landlords with only a few properties, although they are a bit expensive. Most emergencies are water-related, so you can usually find plumbing companies to take a late-night call, but it won't be cheap.

You'll also need to have thick skin. Tenants can get angry, and you must realize this is just part of the job. You'll also need to be able to say "no." Be fair but firm. Never be rude, but don't be a pushover, either.

Step 9: Refinance

If you intend to scale your real estate business, one of the best methods is the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat). To do this, you want to refinance the property after it is fully fixed and rented. That is because if you bought right, you would have equity in it, and with a cash-out refinance, you can pull out all or most of the money you put in initially to buy the property. Then, use that money to start the process over again.

To do so, however, you will need a good relationship with a lender. Therefore, having your accounting in good order and building systems throughout your company is critical. Banks are the traditional route for this, but there are other avenues to explore.

For instance, Kiavi is an excellent partner for refinancing your rental properties. You can take out equity in just six months after your last finance transaction. In addition, you get low rates, speed, and access to a transparent dashboard to track your loans.

Conclusion

While there are many steps to investing in rental properties, none of which are particularly complicated. And once you learn them, it's like riding a bicycle; you never forget. The key is simply to be diligent with each step, and soon enough, you should be a successful rental property investor.

About the author: Andrew Syrios is a real estate investor and writer living in Kansas City, MO. He is a partner in Stewardship Properties along with his brother and father. Their company has grown into a national presence with nearly 1,000 properties and 15 partners in seven states.

***

Ready to discover financing options for your rental property? Kiavi's simple and fast process makes it easy.

Related Articles