Whenever I teach personal finance to law students, I begin by asking the class what they hope to learn.
Without fail, I get a response that goes something like:
“I want to invest in real estate, but I have no idea where to even begin.”
If you’ve ever felt the same way, you’re in the right place.
Today, I’ll walk you through my step-by-step guide to buy your first rental property.
If you can follow these steps (in order), you will be in great shape to acquire your first rental property.
And, if I can be of any assistance as you begin your search for a rental property, please feel free to connect via socials or by replying to one of my weekly emails.
You can sign up for my email list here. I personally respond to every email.
Step-by-Step Guide to Buy Your First Rental Property
- Use common sense and your own life experience to develop your target criteria.
- Pick an initial location that matches your criteria.
- Learn the common, important attributes of properties in your area.
- Study the average rent for units in that area.
- Ballpark how much you’ll need to spend for an attractive property.
- Work with a real estate broker to test your findings.
- Contact a mortgage broker and determine your budget.
- Return to your search and do basic deal analysis.
- Start touring the properties that look good on paper.
- Determine if the numbers will work in your area.
1. Use common sense and your own life experience to develop target criteria.
Don’t believe anyone who tells you he has a one-size-fits-all solution for evaluating properties. Every market is different. What works in Chicago won’t necessarily work in Los Angeles.
That said, there is certainly some advice that applies across the board.
For starters, regardless of what market you’re in, you can and should use common sense and your own life experiences to evaluate rental properties.
Don’t overcomplicate this part.
Before you do anything else, think about what you would personally want in a rental property.
Forget about complex formulas and deal metrics. We’ll get to the numbers soon enough.
Start with a basic question:
What would I want if I were a renter in this market?
Before anything else, write down a list of the most important features that you would want in an apartment. Then, use that list as a guide to finding the right kind of properties.
By the way, using your own common sense is one of the best parts about investing in real estate. You don’t need an advanced degree or a background in real estate.
We all have some idea of what makes a neighborhood a good place to live. The same goes for what makes an apartment a good apartment.
We may not always agree on what those things are, and that’s OK. It may be for a simple reason, like we are not targeting the same potential tenant pool.
The bottom line is you should absolutely use your common sense and life experiences to help formulate your investing strategy.
Ask yourself what you would want in an apartment. Don’t waste your time running the numbers on any property that doesn’t match your criteria.
2. Pick an initial location that matches your criteria.
There are potential investment properties in every part of the country. Before you start looking at individual properties, you first need to select an area you want to invest in.
Based on your own life experiences, you are probably already drawn towards certain parts of the country. You may even have a good sense for different neighborhoods within certain cities that match your general criteria.
From there, you should do some preliminary research online to confirm what you think you know about specific areas.
For example, I know through my own life experiences that many recent graduates from the Midwest move to Chicago after college. The question then becomes: where do these young professionals tend to live in Chicago?
To find out, I might Google something like “best coffee shops (or restaurants/bars/nightlife) in Chicago.”
Likewise, if you’re targeting families, you might search for “best schools” or “best parks.”
Performing this kind of basic research is how my wife and I stumbled upon the Logan Square neighborhood in Chicago.
The truth is that when we first started looking for rental properties in 2017, we knew very little about Logan Square, even though we both always lived in Chicago or the Chicagoland area.
So, we did some basic internet research on where young professionals want to live in Chicago. It didn’t take long to land on Logan Square because we kept finding articles like this from TimeOut: “It’s official: Logan Square is one of the coolest neighborhoods in the world.“
Combined with our personal experiences, these types of articles gave us confidence to take a closer look at Logan Square.
Now, we have 10 apartments in Logan Square.
3. Learn the common, important attributes of properties in your area.
Once you’ve picked an area to focus on, use an app like Redfin or Zillow to create a broad search for that area. You should filter your search based on the criteria you established above.
Take some time to casually study the listings in that area. At this point in the process, don’t worry about running the numbers. You’re still in learning mode.
If you study enough listings in a particular location, you’ll start to notice certain features that separate the premium properties from the mediocre properties.
For example, you may notice that the more attractive properties all have in-unit washer/dryer. Or, you may learn that the attractive properties all seem to have wood floors and stainless steel appliances.
Your goal is to understand the common and important property attributes in that area because those are the features potential tenants will expect to find.
Think of it like this: you don’t want to buy the only property on the block that doesn’t have in-unit washer/dryer. Even if you buy that property at a good price, you’ll struggle to find good tenants if the expectation is to have in-unit washer/dryer.
It’s not an exhaustive list, but here are some of the key attributes we’ve learned are important to young professionals renting in Chicago:
- Location, location, location. Proximity to the L and social life (coffee shops, restaurants, bars, etc.) are crucial. Most of the young professionals we rent to are still in the “going out” phase of life. They want to live in fun neighborhoods so they can enjoy themselves when they’re not working. They typically stay in our apartments for 2-3 years, oftentimes before buying a place of their own and “settling down.”
- Taxes. Property taxes can eat away your cash flow. We have high property taxes in Chicago across the board, but taxes vary widely from neighborhood to neighborhood. I look for properties in areas that have more attractive taxes.
- Big bedrooms. One of the most common questions I get when I do apartment showings is, “Can I fit a king size bed in here?” People love big beds these days. This can be a challenge considering Chicago’s standard 25-foot wide lot. I look for properties with a minimum bedroom size of 10 x 10.
- Outdoor space. Young professionals want to have outdoor space, even if they never use it. When I was a renter, I always wanted an apartment with a balcony for my grill. It didn’t matter to me that I only used it a handful of times each year. Maybe having outdoor space made me feel more grown up?
- Parking. Even though Chicago is a very public transit-friendly city, people still like having cars. Because most young professionals aren’t using their cars every day, they want to keep it safe in a dedicated parking space.
When we shop for a rental property, we look for as many of these features as possible. We don’t expect to check every box because it’s nearly impossible to find a property that has all of these features (at least at a price that makes sense).
4. Study the average rent for units in that area.
Before you commit to a particular area, you need to know what kind of rent payments you might expect.
You can usually find rental information directly on the listing. You may see the actual rent for that property or the projected rent. For this part of the process, this estimate is good enough to get a basic sense of what you may be able to charge.
Word of caution: it’s not unheard of for these rental estimates to be exaggerated in the listings.
As you get to know your market better, you’ll know whether the projected rent is accurate. Plus, you’ll have a real estate broker on your team who can validate the numbers. More on that below.
Finally, studying the average rent goes hand in hand with the previous step of learning the important attributes of rental properties in your area.
For example, you may discover that a renovated 3 bed, 1 bath apartment with in-unit washer/dryer and a parking space rents for around $2,500. Similar units without parking may go for $2,300. Units that have not been updated may rent for $1,800.
Your mission is to differentiate between the property attributes that seem to increase the potential rent in your area from the attributes that don’t add much value.
For instance, we’ve learned that dedicated parking spots are important in Logan Square. However, renters don’t seem to care very much if the parking spot is in a garage or a parking pad.
For that reason, we don’t care too much whether a rental property has a garage, as long as there is dedicated parking available.
5. Ballpark how much you’ll need to spend for an attractive property.
By this point in the process, you’ll have a good idea of what constitutes an attractive property in your target area. You’ll also have a good idea of what these properties rent for.
Next, you can ballpark how much you’ll need to spend to purchase one of these attractive properties.
When I refer to attractive properties, I mean one that has most (but probably not all) of the features that you are looking for and still commands a decent rent. By “decent rent,” I mean not the absolute highest and also not the lowest for the area.
Additionally, the property should be priced reasonably for the market. That means it likely won’t be the most expensive property or the cheapest property.
The goal here is to have a general idea of how much good properties cost in your target area. With this information, you can then decide if it’s an area you want to target, or if you want to explore other locations.
One point that’s worth repeating: don’t expect to find a property that has every one of your key features. If you’re waiting on such a property to hit the market, you’re likely to be disappointed for one of two reasons.
First, you’ll likely end up overpaying for that property. If you overpay, you’ll struggle to earn cash flow. As investors, cash flow is crucial.
Or, you won’t ever buy a property because your expectations are too high. Investing in real estate is all about trade-offs. The fun part of the gig is deciding what trade-offs make sense.
Remember, you’re not searching for your picture-perfect, dream home. You’re searching for an asset that puts money in your pocket.
6. Work with a real estate broker to test your findings.
Now that you’ve educated yourself on your target market, it’s time to seek out the assistance of an experienced real estate broker.
A good broker will talk with you about what you’ve learned and offer additional guidance on your target market.
Also, a good broker will:
- Send you properties that match your goals.
- Tour properties with you to help identify any red flags.
- Negotiate on your behalf to ensure you get the best possible price.
- Connect you with other key members of your team.
- Steer you away from making poor choices.
Don’t make the mistake of jumping right to this step without completing steps 1-5.
It’s important to have done your homework on your target market before talking to brokers. That’s because you need to know enough to have informed conversations with potential brokers.
You don’t have to know all the answers. But, you have to know enough to ask the right questions.
And, you have to know enough to recognize if your broker is giving you misguided advice.
7. Contact a mortgage broker and determine your budget.
Mortgage lending is big business. Just about every person out there needs a mortgage to buy a home or an investment property. As a result, there are a lot of banks and companies out there who want your business.
To be sure, not all mortgages are created equal.
And, not all brokers, banks, and lending companies are created equal.
That’s why your job as an investor is to find a mortgage broker who truly has your best interests in mind.
That means working with someone who wants what’s best for you and your family, not what’s best for him and his family.
Plus, because rental property investing is a long-term game, you want someone on your team who’s also in it for the long run.
A good mortgage broker will:
- Recommend the best loan for your goals.
- Stop you from borrowing more than you really can afford.
- Help get your loan approved.
- Explain the numbers.
- Not let you refinance until the time is right.
In sum, a good mortgage broker understands exactly what you’re trying to accomplish with each purchase. You can be straight with him and he can be straight with you.
8. Return to your search and do basic deal analysis.
Now that you have a real estate broker and a mortgage broker on your team, you can start to analyze deals that match your criteria in your target area.
Don’t let this part of the process intimidate you.
In fact, running the numbers on potential deals should be easy:
Rest assured, you’ve already done the hard part of educating yourself on the key assumptions you’ll need to make to properly analyze deals.
Now, you just need to plug those numbers into a simple spreadsheet or online calculator.
For a step-by-step example on how to run the numbers, check out my post here.
9. Start touring the properties that look good on paper.
After running the preliminary numbers on properties that match your criteria, you should have a smaller list of properties that seem like real contenders.
These are the properties that you should tour.
Again, you want to make sure you don’t jump ahead to this step without having completed the other steps.
That’s because it’s impractical (if not impossible) to tour every property that appeared in your initial search. By running the numbers first, you can weed out the properties that would be a waste of time to see in person.
After touring a property, you should then update your preliminary analysis based on what you learned.
For example, maybe you learned that the bedrooms are smaller than advertised. Maybe the finishes aren’t as nice as in the pictures.
The point is that after seeing a property in person, you may determine that you previously overestimated what the unit will rent for.
You also will have a better idea of what you think the property is worth.
A final word here: some investors are content buying properties without touring them in person.
Personally, I would never buy a property without walking through it first. I want to see for myself what condition the property is in and make my own assessment of what it could rent for.
10. Determine if the numbers will work in your target area.
The final step is to put together everything that you learned in steps 1-9 to determine if it’s a good idea to invest in your target area.
If you like what you’ve learned, you can stay disciplined and wait until you find an attractive property to offer on.
On the other hand, you may find that your initial target area is not ripe for investment.
That’s OK. It’s certainly better to find that out before you commit hundreds of thousands of dollars to a poor investment.
Before my wife and I settled on Logan Square, we went through this process and ruled out a number of other promising neighborhoods.
By putting in the effort to complete steps 1-9, we learned that the math simply did not work in certain parts of the city.
In some neighborhoods, the properties were just too expensive to earn positive cash flow. Then, in other areas, the rent was not high enough to justify the purchase price or high taxes.
In the end, we determined that Logan Square had the right combination of attractive properties and decent rents.
Step-by-Step Guide to Buy Your First Rental Property
- Use common sense and your own life experience to develop your target criteria.
- Pick an initial location that matches your criteria.
- Learn the common, important attributes of properties in your area.
- Study the average rent for units in that area.
- Ballpark how much you’ll need to spend for an attractive property.
- Work with a real estate broker to test your findings.
- Contact a mortgage broker and determine your budget.
- Return to your search and do basic deal analysis.
- Start touring the properties that look good on paper.
- Determine if the numbers will work in your area.
Like any new skill in life, implementing this step-by-step guide takes some time and effort in the beginning.
The upshot is that if you can follow these steps, you’ll get that first rental property and have the skills to acquire additional properties when you’re ready.
If I can be of any assistance as you begin your search for a rental property, please feel free to connect via socials or by replying to one of my weekly emails.
You can sign up for my email list here. I personally respond to every email.
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