Buying your first rental property will almost certainly be downright scary. Much more than investing, say, in the stock market. Why?
- The down payment is a big part of your savings
- It's difficult to reverse your decision and sell at a moment's notice
- You don't know anyone else who is a landlord
- The exact steps to buy and rent a place out are unclear
The commitment level is high so your emotions will be magnified. And the buying process is going to take a couple of months. But knowing what is coming makes it less scary.
Other than anticipating the emotional roller coaster, what else can you do? Here's my m.o.:
- Get organized. Have an attorney pre-selected. Have 2 to 4 banks pre-qualify you (see link below). Have all your documents in electronic format and files labelled correctly.
- Have one single email thread. The only people on it should be your attorney, broker/property manager, and lender. Start it as soon as the offer to purchase is signed back. Use separate threads sparingly.
- Respond quickly and precisely to requests. Follow up if you think your attorney, broker/property manager, or lender have missed a deadline.
This playful chart isn't to show every legal step you need to become a landlord. It's to show the emotional journey you may have the first time you buy an investment property.
A. You're full of excitement. You've made the decision to get into real estate investing. You're scrolling through your broker's listings (and Zillow, just for fun).
B. You've run the numbers on about 30 places. Yes, you've seen a few places, but they've all had problems too big to overlook. You're getting bored. And a little frustrated. Your evenings are half an eye on Netflix and half on spreadsheets.
C. You've found one. A good one. The numbers make sense for you. The place also looks great in person. You've even seen a couple of improvements you can make. You work quickly with your broker that evening to make an offer to purchase. You hit send and head to bed.
D. You're in a negotiation with the seller 36 hours later and (your broker/property manager thinks) against a couple of other investors. The seller is unresponsive hours after deadlines pass. Then asks for more money. Then waits. And waits some more. You hurriedly check every text that comes through in case your broker has an answer.
E. You finally get the sign back and you're on a high! You won, dammit. You write a deposit check. You feel reality hit you. It's thousands of dollars leaving your account in the blink of an eye.
F. You start to get all your proof-of-income, your tax returns, your...the requests seem endless and pointless. You're forever emailing with your bank, your closing attorney, your broker/property manager. Oh and the seller is slow to respond to the smallest requests. You curse them.
G. You do the home inspection. You get the results of the appraisal from the bank. Ugh. Both make your heart sink. Every tiny thing adds up. Thousands of dollars to make it just perfect.
H. You're just waiting. Your bank now knows more about you than your mother. And suddenly the bank seems in no rush to give you final approval to close. You worry it may never happen. And you start to second guess yourself. Did you do the right thing?
I. You're. A. Landlord. Your closing attorney has a small trees' worth of papers to sign. But you own an investment. You're full of pride. You tell your friends. You tell your family. You feel a new chapter open.
J. Your property manager had a tenant lined up, but it fell through. Your PM reassures you they're doing all they can. But you also know you're days away from your first monthly mortgage payment.
K. Your property manager calls you to say they've got a tenant. "It's $50 per month lower than market but their credit is...". You say yes before the sentence finishes.
L. You check your rental online bank and you see a juicy number in the 'deposit' column. You have cash flow. You have income. You're excited to check next month's deposit...
Buying a place solely to rent it out should be a logical, financially-driven decision. Make sure it is. But like any investment, emotions are at play. And because you're committing to a huge decision stretched over a couple of months it can be draining. Anticipating these emotions makes it easier. As does doing it the second time. And then the third time.
Most people buy their first apartment or house without considering if it will make a good future rental investment. I'm not advocating that you should always rent out your primary residence once you move out. You may need the equity for a new (larger?) place. I am suggesting if you're thinking about buying your first place for yourself that you may want to rent it out in the future. It should factor into your decision making.