Buying investment real estate can seem like a daunting process when first starting out. You may be wondering how it differs from a typical homebuyer experience when the real estate is owner-occupied. Many of the steps are the same as in a personal homebuying process, with a few caveats.
Understanding the differences and knowing what actions need to be taken and when will help the home purchase go smoothly and efficiently. With that in mind, we've created this list of eight steps to buying a house so that you can easily navigate the various to-dos and get the keys in hand.
1. Determine what you are looking for
This crucial part of the preplanning stage will help you determine your buying criteria and focus your efforts and money on finding the right investment. Some questions to help you start building your criteria include:
Answering these questions will help you narrow down your search while also eliminating properties that may not be in reach at this time.
2. Calculate your price point
The price point for an investment property is not based only on your credit score, income, and monthly mortgage payment. Since this will be an investment property, you will need a larger down payment (typically 20% down) to get financing, so you will need to have sufficient funds to cover this expense, as well as the typical closing costs and realtors' fees.
You will also need to consider the going rate for rentals in the area or what spread or cash flow after expenses makes sense as it relates to the retail-market purchase price for homes in that area. Run your numbers now to get a solid idea of what purchase price will actually make you money.
3. Find a real estate agent
This step is investor-dependent, as some real estate investors prefer to make offers directly to the homeowner or seller's agent to save themselves the money. But many will choose to work with a real estate agent when looking for investment property. This will be particularly important if you lack not only prior experience negotiating deals and handling the associated paperwork but also suitable contacts in the industry to get the rest of the process to closing.
If you decide not to work with an agent, you'll need to identify the best marketing practices to reach potential sellers, which could include direct mail or other marketing efforts.
4. Get a preapproval letter
Many real estate agents will not show you properties until you have a preapproval letter in hand. This letter ensures that you are not wasting time -- yours or theirs. Steps 3 and 4 can go hand in hand. If you're comfortable with getting a preapproval letter on your own, you can do so before approaching a realtor so that you can tell them, with certainty, what your budget allows.
If you need recommendations for a reputable mortgage lender in your area, your real estate agent probably has several they can recommend. At this point, you'll provide the initial verbal information to the lender. In step 7, you will have to provide supporting documentation.
5. Find a property and put in an offer
Now that you know exactly what your criteria and price points are to make the investment worthwhile, it's time to start analyzing. Once you find a piece of real estate that meets your needs, run the numbers and put in an offer.
Some investors start with a verbal offer to save time, but only do this if it is a buyer's market -- or you may risk losing the deal to another buyer. Once you have an accepted written offer, you will need to select a closing date and put down your earnest money.
6. Lock in your lender
Getting your preapproval letter is important but is essentially a loan estimate. It will be followed up by completing the actual loan application process, which is when you will provide the required documentation, and the lender will pull your credit report.
The loan officer will also define the loan term and interest rate, which will vary depending on the type of home loan you select. After these details are confirmed, the mortgage broker can give you the total monthly mortgage payment based on the purchase agreement price.