Do you want to go to your mail box every month and collect a check?
I do. That sounds pretty sweet.
It also sounds too good to be true.
It’s not but it takes a little work to get there.
So don’t think this is a free lunch.
But you can do it.
Here are the steps to do it:
Get Pre-approved for Your Loan
You probably thought you should find the property first.
That’s putting the cart before the horse.
Any offer you submit will require a pre-approval letter from your bank.
The seller wants to know you’re not wasting their time.
So contact a lender.
This could be a bank, credit union or mortgage broker.
They’ll walk you through the process.
Get them to write you a new letter with every offer though.
You don’t want a letter that says you can spend $500,000 when you are offering $100,000.
Find the Property
Now you search for a property.
Use a good real estate agent to find a property.
You might think you get a better deal without a real estate agent because of less commissions.
But that may or may not be the case. It’s up to the seller.
The seller pays commission to the seller’s agent and the buyer’s agent.
The seller and the seller’s agent agree to the commission before putting the house on the market.
For example, market commission in Atlanta is 6%.
So the seller will pay 6% to the her real estate agent regardless of the presence of a buyer’s agent.
If there is a buyer’s agent, the seller’s agent just splits the 6% with the buyer’s agent.
The split is typically 50/50.
So you might get a 3% discount but that’s up to the seller’s agent and seller.
The benefit of having a buyer’s agent outweighs potentially losing out on a discount in my opinion.
A good agent will keep you out of bad areas.
You do not want to be in bad areas.
You will get crappy renters.
Find the good public school districts in your area and stay in those districts.
Your agent will also walk you through the offer and contract.
Now let’s start an example.
In our example, you find a $150,000 house in a good school district.
And put it under contract.
This is just a fancy way of saying do your homework.
Once the property is under contract, you have short time period to inspect the property.
This is your inspection period.
It starts right after you and the seller sign the contract.
It ends when it says it does in the contract but that’s usually 5 to 10 days.
Hire a home inspector to come out and check out the home.
He will tell you specific areas that need repair.
He’ll also tell you if there are any deal killers.
Deal killers are expenses that are too expensive to make the home worth it.
During the inspection period, you also want to determine the amount of rent you can charge and your monthly expenses.
Have your real estate agent pull comparable properties with comparable rents.
In our continued example, your inspection came back without issues and you can rent the property for $1,400 per month.
Your expected expenses are $900 per month.
This includes your loan payment, property taxes, property insurance and miscellaneous maintenance items.
You expect to make $500 per month.
Finalize Your Loan and Close
In the background this whole time, your mortgage broker was hustling to close your loan.
With the current lending environment, you will have to put 20% down on an investment property.
In our example, that’s $30,000. This is your initial investment.
We’ll use this to calculate your return.
Your mortgage broker will lock your interest rate.
Expect to pay a higher interest rate than the current quoted rates on the internet.
Like the ones listed on Bankrate.com.
Because it’s not your primary residence.
In this example, you get a 5% interest rate.
I’ll assume you pay your bills on time and have a good credit rating.
Once the mortgage broker gives you the clear to close, you show up and sign documents.
Congratulations, you own a new asset.
Rent the Property
Now the fun part.
You get to rent the property.
I would also recommend using a real estate agent here.
It will cost you a month’s rent for commission but the caliber of tenant you attract tends to be better.
And that can save you big money in the long run.
In our example, you get $1,400 per month in rent as you expected.
So after one year, you cleared $6,000 in net income before taxes and paid $30,000.
That’s a 20% return on your cash!
Renting residential real estate is a great way to build wealth.
Our 20% return example proves that.
But it’s not always as easy as some people want you to believe.
Finding the right property is difficult and takes time.
That’s good though.
If it was easy, everyone would do it.
And there wouldn’t be as many opportunities for you and me.
So start hunting for rental property. You’ll be glad you did.
Have you purchased any rental property recently?
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