Advice for a smooth buying process (from experienced real estate investors)

A clear buying process is essential when investing in real estate. It reduces risk, avoids costly delays and facilitates quick property acquisition once the right property is found.

Here I will outline my recommended process.

before you start

Start by getting your finances in order. Specifically, determine the amount of credit and cash required to purchase an investment property in the market of your choice.

For example, here’s the cash and credit needed to purchase a $350,000 property with a 30% down payment, 2% closing costs, and a renovation budget of $10,000:

• down payment: $350,000 x 30% = $105,000
• Closing costs: $350,000 x 2% = $7,000
• furnish: $10,000
• Total acquisition cost: $122,000
• Loan amount: $350,000 x 70% = $245,000

So, in this market, if you don’t have at least $122,000 and $245,000 pre-approved, you’re not ready to get started.

define your goals

“If you don’t know where you’re going, you’ll end up somewhere else.” – Yogi Berra

For most people, the goal is financial freedom. Financial freedom requires reliable income, which means your rental income will continue even in bad economic times.

There is a common misconception people have about property and renting. The real estate never pays rent; the tenant occupying the property pays the rent. Therefore, the reliability of income depends on having reliable tenants, not the property. A reliable tenant will stay for many years, pay rent on time, and take good care of the property.

So rather than buying a property based on one person’s opinion, it’s better to identify a tenant group that has a high percentage of reliable individuals. Determine what and where these tenants currently rent and purchase similar properties.

You can identify this group of tenants through property manager interviews. Simply put, ask multiple property managers what property they would buy if they wanted tenants who would stay there for many years, pay rent on time, and take good care of the property.

In 2005, when I was starting my investor business, I asked too many property managers this question. Most people identify the same types of attributes.

Create a property file

Once you know which properties attract reliable tenants, you can build property profiles that describe those properties. There are at least four elements to a property profile:

1. Place: Determine where the majority of your target market segments currently reside.
2. Property type: Determine the type of property these individuals currently rent, such as an apartment, high-rise, multifamily, or single-family home.
3. Rental range: Determine the amount this group is willing and able to pay, usually around 30% of their total monthly household income.
4. Configuration: Determine the features you want in the property, such as two bedrooms, a three-car garage, a large backyard or a one- or two-story home.

Once you have a property profile, you can provide it to any agent and they can find properties that match your requirements.

However, simply meeting the housing requirements of a targeted group of tenants is not enough. The following are additional attribute selection considerations:

• Return on initial investment and cash flow
• price
• rental time
• Renovation costs and risks

Knowing your selection criteria before you begin will simplify the property selection and evaluation process.

Decoration precautions

Almost every property needs renovation. How do you decide what to renovate? To understand the process of determining what to renovate, you need to understand the concept of “market readiness.”

A property is considered market-ready when a majority of your target group of tenants is willing to rent the property at market rate. Determine what market fit is by comparing your property to similar rental properties available on the market at the time. Market readiness has nothing to do with what you like or don’t like.

For example, let’s say your property comes on the market with laminate kitchen countertops. Should you install granite counters? It depends on the competition. If a competing property also has laminate counters, spending the money to install granite is not a good investment.

Also, let’s say your property comes back on the market in a few years and a competitor has granite counters. Installing granite kitchen countertops is now a necessity.

The conclusion is that “market readiness” depends on current competition; market readiness is not static.

It takes a team

Everything you learn from podcasts, books, workshops, and websites is general information. You will be purchasing a specific property in a specific city, under specific conditions, and subject to specific local rules and regulations. The only source of this hyper-local information is the investment team.

Additionally, you’ll need processes, local resources and skills to bring your property to market. No matter how hard you try, you can’t replicate the experience and skills of a team with years of experience.

If you needed surgery, would you sign up for medical school? No, you need to find a surgeon who has expertise in the specific procedure you need. The same goes for real estate investing.

final thoughts

Successful investing begins with obtaining the necessary financial resources. Next, select a location with significant and continued population growth. Then, identify groups of tenants with a high proportion of reliable personnel. Determine the types of similar properties these people currently rent and purchase.

Following the steps in this process will greatly increase your chances of success. Choosing to go it alone increases risk, costs more and requires more time.

Find the right agent, find the right property

Step #1: Use Agent Finder to match the top investor friendly A real estate agent helps you find, analyze and close your next deal.

Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.