Investing in Rental Properties for Beginners
How to get Started in Real Estate Investing
So, you want to invest in real estate but may not know where to start. You are not alone. As with anything in life, starting can be the hardest part. Here is a simple outline of how to get started in investing in rental properties.
Hire a Team
The team you hire is your biggest ally in getting started in real estate investing. The right team will know how to take you from where you are to where you aspire to be. They must be experts in the field you are looking to get into and should have success stories for other clients as well as themselves. This is the crucial first step towards success because they will steer you down the right path.
a. Real estate Broker / Agent
Hire a representative that specializes in the field you are looking to invest in. If you are looking to invest in multifamily, then it’s in your best interest to hire a multifamily agent. If you’re looking to get into commercial office space, then it's best to hire an expert in that field, so on and so forth. Note: There is a big difference between a residential agent and a multifamily agent. One knows how to turn properties into profit and does so consistently for clients, the other may guess how to do it.
If you are a beginner, it’s advisable to work with someone who works with beginners. There are many multifamily agents out there, but being new to the industry takes a special hand-holding that not all brokers are willing, or capable, of doing.
Similar with choosing the right representation, it is also advantageous to work with someone who specializes in the type of investment you are buying. If you are purchasing multifamily property, then your lender should primarily focus on multifamily. In an ideal world, your lender will also have experience themselves in owning multifamily, so they can guide you on your path. Investor-friendly lenders know about the nuances of requirements for 2-4+ unit purchases and refinances and can get creative about navigating hurdles to get the deal closed. Your broker will be able to recommend the resources he or she uses.
c. Other contacts you will need on your team eventually (your broker should have vetted resources for you):
Real estate attorney
2. Narrow down your budget and/or get Pre Approved
The next step is to determine what your budget is and to collaborate with your team to see what that gets you in your market. Ask yourself the following questions:
a. How much cash do you have to put towards an investment?
How much cash you have will determine the size of a down payment you can afford. Does that get you a condo? A single family house? A 2-4 unit or an apartment complex? What type of return can you expect? Consult with your apartment broker to see what your best options are.
b. How much are you pre approved for?
If you do not have the 30-40% for a down payment for an apartment complex (that’s a minimum of $400,000 in San Diego County), then your option in San Diego is residential. Whether that be a condo, single family rental or 2-4 unit rental, all of these are considered residential and financial institutions lend based on the borrower and not the property. A pre approval letter from your lender will tell you how much you can afford.
Note: When buying a 2-4 unit property, in some cases 75% of the income on the property can be put towards the approval amount.
3. Collaborate with your Broker and Lender to Determine Your Investment Strategy
Below are a few key strategies for investing in rental property:
a. Buy turnkey
“Turnkey” means something that is in “rent ready” condition, meaning, you don’t need to put much capital into the property to obtain rental income. If you don’t have much money to put towards renovations, this may be your best option.
b. Buy value-add
“Value-add” refers to a property that you can… well, add value to. There are a few strategies for this in San Diego, such as converting existing garages into additional dwelling units (ADUs) or renovating a unit for a better post-renovation rent.
c. Buy extreme value-add
San Diego County has rent control in place, which limits the amount owners can raise rents as well as limits the reasons landlords can terminate tenancy or give evictions. Those who do “substantial renovations” to their building, as defined under the rent control bill, are allowed to evict tenants on the premise of undergoing substantial renovations. Owners can buy a building that is underperforming, renovate the entire building, raise the rents to the free market level, and either refinance or 1031 exchange their profits into another building.
4. Learn the market
The best way to learn the market is to start analyzing deals. Now that you have your broker and lender in place, have identified your budget and what type of investment you will buy, the next step is to have your broker present the top deals available in your market and analyze all of them. This helps you get familiar with the market and helps you identify the best deal for you. Your broker will be able to help you turn deals into dollars.
5. Start writing offers on the best deals
Yes, you read that right. Start writing offers, plural. By writing offers on multiple properties, the best deals will begin to identify themselves. You will see who is a motivated seller and who is not. Perhaps an offer you wrote got beat out by another offer, and then the buyer didn’t perform and you are next in line. By writing offers on the top options in your market, you are giving yourself the best chance of success and not limiting yourself to one option that may or may not work out.
Do your preliminary due diligence by analyzing the deal on a surface level, such as income and cash flow and the potential it has. Once you have an accepted offer you have time to do a thorough investigation of the property before choosing to move forward with the purchase.
6. Once You’re in Escrow - Conduct a Thorough Due Diligence
Below are the main due diligence items to conduct while in escrow, (your broker will have recommendations for third party professionals):
Contracts associated with the property
Income & Expense Records
Insurance Loss / Run Letter
Past Inspection Reports
Personal Property list of items that convey with the property
7. Close escrow
Once you have done a thorough investigation of the property and understand what you are purchasing and know that it still makes sense, you can move forward with funding the loan and closing escrow.
8. Implement your Strategy
Once you have closed escrow and officially own your new property, you are free to move forward with the plan you set in motion, whether it is to simply take ownership of the property because you bought a turnkey asset, to give termination of tenancy to owner-occupy a unit, or to do renovations to the property. If you are going to be doing a “value-add,” you will need to identify the best time to execute a refinance or 1031 exchange, collaborate with your broker to time the market and follow through with your strategy.
Like with most things, it is best to begin with the end in mind when it comes to your investment career. But, to get to where you want to go you have to first start with where you are now and to set the best plan in motion within your given circumstances. It is great if you want to own a 100 unit building, but if you have $100,000 in the bank, you need to first see what you can do with that that will lead you to your next best move.
Contact Christina to start setting your plan in motion and build financial freedom.