One afternoon at my community’s garden I met Betty Jo, a Financial Services Sales Director who dreamt of being her own boss. We got to talking about our career goals, and I mentioned that I’m a professional real estate investor and independent businesswoman. I wasn’t surprised when she said it is something she’d considered leaving her corporate job for. I’ve known dozens of professional women who’ve wanted nothing more than to strike out on their own and start a business—and real estate investing offers the flexibility and financial potential that fits well with many women’s aspirations.
But, like many women I’ve talked with before, she just didn’t know how to get started. She didn’t know how to purchase income property and was afraid to face financial risks without the guidance of an experienced mentor. I told her that a smart woman with a can-do attitude could solve these problems. And, I was willing to tell her how.
How to Purchase Income Property: The Steps to Success
Lots of people have professional skill sets that apply to real estate investing, but knowing how to purchase income property that can be rented out for a strong return is a unique challenge. From finding an investment property in the first place to calculating the cap rate, doing your due diligence and getting financing, there’s a lot of variables. And, a lot that can go wrong if you don’t have the right tools and support.
That’s why I tell new real estate investors to start small. Begin by buying just one single-family house. You will be able to hone your skills without becoming too overwhelmed. And, having a single tenant to manage will make starting out a lot simpler, giving you time to adjust to being a landlord for the first time.
That being said, like everything in business, learning how to purchase income property is a process that can be broken down into steps. Here are the basics that I shared with Betty Jo:
#1 Identify Potential Leads
Where can you find an income property with a good ROI potential? There’s a variety of sources for finding real estate investment deals, but some are better than others.
- Foreclosure auctions and sheriff sales are a popular option, especially if mortgage or tax defaults are up in the area and there’s a growing supply. To find one, inquire at your county sheriff’s office or the courthouse. Buyer beware, however, because foreclosure auctions and sheriff sales may not offer access to a property to inspect in person before the sale, meaning you won’t be able to get a clear picture of the renovation costs before you buy.
- Investor networking clubs sometimes offer word-of-mouth leads. It’s a gamble, though, as many clubs are full of well-meaning and friendly people, but they are often just as inexperienced as you are. And, the experienced investor may not be motivated to share their leads.
- A real estate agent that specializes in investment properties. While real estate agents are often very knowledgeable of the areas they work in, they’ll want a commission, which subtracts from your margin.
There’s a better way to find qualified leads. You’ll need to develop a strong marketing strategy to reach motivated sellers directly. An integrated campaign will get you the best results, as you should use a variety of channels to find potential sellers. These include using billboards, television and radio commercials and direct mail. If you craft a single marketing message and deliver it to potential sellers at a variety of different touchpoints, you’ll have the best chance of generating property leads that have potential.
#2 Ensure the House Has a Good Cap Rate
A capitalization rate, also known as a “cap rate,” predicts how much of your investment monies you’ll earn back yearly. Good cap rates vary by region, so talk to other landlords to find out what they are earning on properties that are similar to the one you are considering. But, landlords aren’t always investment specialists, so having a knowledgeable mentor you can consult with is a great way to help you evaluate the deals you’re considering.
To see healthy returns from your investment, you need to buy the house at a low enough cost that the market rent covers the holding costs plus additional returns. And, that brings you back to getting leads—specifically, leads from distressed homeowners. Often, homeowners who are in over their heads financially or with repair issues are motivated to sell, even if it means getting less than full market value. Buying low can ensure that your cap rate provides healthy returns.
#3 Do Your Due Diligence
When avoiding buying a money pit, make sure you do your homework. That means getting a property inspection that will alert you to any problems that you’ll need to repair before tenants move in. And you’ll need to carefully read the title report, which lists a property’s previous owners, as well as any easements, liens, or encroachments. Gathering this information about your intended property will spare you from many headaches later on down the road.
Part of your due diligence needs to be gaining an accurate estimate of what your rehab expenses will be. Nothing’s worse than buying a house and finding out it will need extensive repairs, such as foundation problems, mold, or water leakage that you haven’t budgeted for. That’s why having an effective property valuation tool can make or break your deal.
#4 Get Financing Lined Up
The next step in making a successful income property purchase is to have a plan for financing for both the cost of the house and the rehab. If you are only buying one or two properties a year, you can look into traditional home rehab loans, including:
- FHA 203(k) may offer a down payment as low as 3.5%, but will not apply to all rehab projects and you will only have six months to complete the project. That’s not a lot of time, especially if this is your first rehab.
- Fannie Mae Homestyle Renovation loans can be used for any renovation that improves the value of the property. But, it can be hard to find a lender and you will not be allowed to do any work yourself, so contractors’ fees can eat into your returns.
The best bet is often to get a hard money loan. These loans base their funding amounts on the after-repair value of the property and, because they come from private lenders, are more flexible in terms than banks. You’ll pay a higher interest rate for this short-term option but have the ability to refinance with an easier-to-work-with bank loan once the rehab is complete.
Within each of these steps, there’s a lot of complexity—and Betty Jo was right in feeling like she needed more support before jumping in headfirst to purchasing her first income property. Luckily, I was also able to tell her how to get that support.
Purchasing Income Property With Strong Support
I told Betty Jo the biggest secret behind my career success. Rather than go it alone, I became an independently owned and operated HomeVestors® franchisee. I’ve received comprehensive training, proprietary valuation tools, dedicated mentorship, qualified leads, and access to money ever since. The nationally-known and trusted “We Buy Ugly Houses”® marketing campaign has been especially invaluable in helping me buy multiple income properties and grow my portfolio.
You can gain all of those advantages and stay in control of your independent professional real estate investing business by becoming a HomeVestors® franchisee, too. Contact HomeVestors® today to learn how to purchase an income property like a seasoned pro.
Each franchise office is independently owned and operated.