What you are going to find if you have not yet bought your first investment property is that when that right house comes along, at the right price, your ability to purchase that property is going to depend on your ability to act quickly and competently.
Your ability to act quickly is going to be rooted in how ready you are to take action when that right opportunity comes along. Your ability to act competently is going to be rooted in your knowledge, your resources and your decisiveness, which when assembled properly, in advance, will result in your confidence and your success.
It is critical to be ready and be prepared. Maybe you are an experienced home buyer because you bought two or three homes during your life for your personal residence. Be forewarned, you are going to find out when you venture out to purchase a home for a real estate investment, it is very different compared to the home you bought to live in with your family. When purchasing an investment property, not only will the actual house have different characteristics and traits but so will the actual transaction be different compared to those times when you purchased a personal home.
This pool of good investment properties is very limited. You are going to find the competition to get at that limited pool is very intense. So you are going to have to be very prepared.
To drive this point home, I am a one-time, part-time investor who used to have a corporate career. Now I am a full-time investor and I own a HomeVestors franchise here in Dallas, and as a full-time investor, my single largest expense is advertising. That advertising expense is specifically and strategically designed and executed to directly identify and reach potential home sellers so I can find the best real estate investment properties that are out there.
That pool of sellers and investment properties is limited, not easy to find and it is incredibly competitive to gain their response. And because of those factors, my single largest expense on an annual basis in my business is my advertising. It is, however, that advertising that gives me a competitive edge to get to those properties – the right houses, at the right time, at the right price.
I make that point only to help illustrate how difficult it is and how hard you have to work to find these properties. And when you do find them, you need to move fast. You see it on television on the weekend when you are watching the home improvement shows or shows about flipping houses. You will see those investors buy homes sight unseen, perhaps at auction. You will see those investors pull out cashier’s checks on the spot in order to buy those homes.
And I will be honest, that is a very real aspect of those “reality” TV shows. Yes, investors do buy homes sight unseen. Sometimes you have to do that in order to get to the best deals. You cannot afford to wait. And you do use cash and cashier’s checks to quickly execute and get to these properties.
And I can speak from personal experience. Right, wrong or indifferent I have purchased homes and never seen the inside of them. And I own rental properties to this day that I have never seen the inside of them because of the fact I looked at them and analyzed them from an investment perspective. I determined they were good investments from a numbers perspective. And I acted quickly to get them. I still hold them and they still perform well, even though I never saw the inside of them. The nature of the purchase was that I had to move quickly, and I was prepared to move quickly in order to get them.
What do I mean by being the ready investor?
I have six things I am going to mention in order of importance. These are all items of readiness or preparedness you as a part-time investor should work on now so that when it is time, and you do find that property, you are ready and you do not miss that opportunity. Especially in today’s market. Our housing market is on fire. Supply is low and demand is high. And it is even more so on the investment side of it. There are a limited number of homes available across the U.S. and an even more limited number of investment homes. So you can imagine the competitive nature and how critical it is to be prepared to move quickly.
No. 1 – Make sure you have your cash ready
This is not just if you are a cash buyer. Obviously you are going to have your cash ready if you are a 100% cash buyer. But many of you as part-time real estate investors will not be. The majority of you will probably be purchasing homes with a loan of some form. And when you do that, you will also be required to put some portion of that purchase price down as cash.
For simplicity, we are going to assume, and I would encourage you to assume, if you are using a lender you are going to have to put about 20 percent down. That is a good assumption unless you have some other unique, confirmed arrangement with a lender that allows you to put less than 20 percent down. If not, assume you are going to need 20 percent down. For example, if you are going to buy a $100,000 house you need to make sure you have $20,000 cash ready to deploy to purchase that house. You hate to find that great house, at a great time, at a great price and then realize, “Gosh I need to save up another $8,000 still in order to get the down payment,” and then watch that house disappear and go to another investor. So be ready and have 20 percent down. And what a lot of people forget – you have closing costs too. I always assume I need to be ready for about 5 percent of the purchase price for closing costs like loan origination fees, survey, appraisals, escrow money and miscellaneous fees the title company will charge.
No. 2 – Work now to get your lender in place
When you do find that house, you want to know you are already approved and you have a relationship with a lender who is going to lend you the other 80 percent so you can go purchase that house. I suggest you go out now, develop a relationship with a lender and look at multiple lenders. I like to use 15-year mortgages, fixed rate, to keep things simple. When you do find that lender, make sure you get a pre-approval letter. You may come across a house and it may require a pre-approval letter from a lender indicating you have the abilitiy to secure the funds to purchase that house. If you don’t have that letter, I guarantee you the other individuals who want that house, they will. And they will be the ones who get that house over you.
No. 3 – Line up your insurance provider for the house
This may be the same insurance provider you use for your own personal home or car. They may offer homeowners insurance and they may be ready and willing to put a policy on your rental property. Make sure that is already lined up. And also, I not only purchase a homeowners policy but also a liability policy on the property. You may not have that on your personal home, but it can be a good idea on your rental home.
No. 4 – Have your property manager in place
If you are not going to manage your rental on your own, make sure you’ve got your property manager ready to go. You don’t want to buy that first rental and then spend a month or two seeking a property manager – you are going to lose two months of rent. That is an expensive time. You do not want to waste that time. You want to get that property occupied right away. Plan on giving that manager at least one half of the first month’s rent if they do find you a tenant. That is a typical fee for sourcing, screening and getting that tenant into that house. Then assume they are going to charge you 10 percent of your monthly rent from that point forward. You may be able to do better. But once again, this is a good benchmark. It will help you evaluate potential property managers knowing these two standards.
No. 5 – Get your maintenance man in place
This is typically an unlicensed “handyman.” The guy you can call on-the-fly when a door gets jammed or a toilet doesn’t flush, or a sink doesn’t work or a light fixture or ceiling fan doesn’t work. Simple repairs you need to get done quickly – make sure you’ve got a maintenance man lined up so when you do get those calls, it does not pull you away from the Saturday soccer game with your kids. You’ve got somebody ready and waiting who can take care of those things.
No. 6 – Make sure you have your licensed contractors lined up
Unlike your handyman, these are the big three, the licensed contractors you need: Your plumber, your electrician and your HVAC or air conditioner and heating repairman. They are going to be critical. And when you do need them, you do not want to be looking around and searching for them. Your tenant will not be happy with that. And you will not be happy with that. Have those contractors identified and ready for those occasions when you need them, because you will.
In conclusion: If you are feeling overwhelmed with all this preparation and readiness, don’t forget if you are using a real estate sales agent to find that first property, they can help you with many of these readiness steps. They can help you identify lenders, they can recommend insurance providers and they can even get you a property manager. They may also know maintenance contractors and licensed contractors. They know title companies and home inspectors. So don’t get overwhelmed. Remember to use them because they are a great resource and a critical member of your team. They can help you with all these different aspects of your readiness and preparation.
If you prepare now, you will be able to take action in the future. You will be the success story of the investor who got that great house because they were ready to take advantage of a great opportunity when it presented itself.
You will also find your confidence will increase when you are ready. Your momentum in your business will increase. And your part-time real estate investing will become an inspiration vs simply an aspiration. So get ready now and prepare for your inevitable success in the future!