The beginning of a new year is upon us, and it just might be that part of your plans for 2018 include buying your first house as an investment. Congratulations! That’s an excellent decision. But now, where do you begin? What does the process look like from start to finish? Let’s break it down, step by step.
1. Find potential properties
Before you can purchase a real estate investment, you need to know what you’re looking for. A good investment will meet several qualifications. First, it will not be retail-ready. You want to find a property that needs some degree of renovating so that you can purchase it at a discount.
Second, you need to consider deals that provide both cash flow and equity in order to build wealth. If you purchase a house for $70,000 knowing that a $30,000 rehab will result in a retail value of $150,000, you already have $50,000 of equity built into the deal up front. This is good. This protects your debt position which means that, should the market change and you need to liquidate the asset, you don’t have to bring your own money to closing. Cash flow is equally important because it keeps you from writing checks into your investment every month. The goal is to make money, not to spend it.
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2. Invest in potential sellers
Once you’ve identified those potential properties, you need to make your intentions known by investing in those sellers. You could be dealing with a homeowner, an heir of the property, a real estate agent, an attorney, or a wholesaler. In every case, you invest in the sellers with two things: your time and your money. Spend money on regular, consistent, long-term marketing, and spend time getting to know the specific needs and wants of the potential sellers.
3. Make offers and get contracts
When you make an offer on a house, it needs to be a solid offer. Don’t insult the seller by riddling your contracts with a plethora of contingencies and back-out clauses. Good offers will benefit both the seller and the buyer; it will be profitable for you and fast and convenient for the seller. Once you agree on the offer, you get the house under contract and take the contract to the title company along with an earnest money check. An earnest money check is simply a promise to pay. If your promise is solid (as it should be), your earnest money check should reflect that. Again, don’t insult the seller by offering a $100 earnest money check on a $200,000 house.
Never entertain the idea of trying to avoid using a title company. You don’t conduct business at a coffee table or on the hood of a car or at a corner booth in Denny’s. If you find a seller who wants a “handshake deal” in which you bring a check and he brings the deed and you call it a day, politely decline and take your business elsewhere. The title company is essential in that it looks for any legal or financial issue that could be a liability to any party in the contract.
4. Line up your capital
While the title company is researching and preparing for closing, you need to be lining up your capital to purchase the asset. This could involve hard money, private money, owner financing, partnerships, or a subject to arrangement.
5. Schedule closing
Closing is simply the official transfer of the property from the seller to the buyer. All of the money goes into one big account and the title company disperses the money to everyone that has a claim on that asset. Obviously, this includes the buyer and the seller, but it also involves administrative fees, insurance fees, attorney fees, home owners’ association fees, taxes, title fees, and any other miscellaneous parties that may come up. The process requires a lot of paperwork and countless signatures by both the buyer and the seller, but once it’s complete, congratulations! You’re now the proud owner of an investment house that needs a whole lot of work!
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6. Begin rehab
Rehab should begin within a few days of closing on a property to ensure that your property is back on the market as soon as possible. The best way to do this is to hire a contractor. We use Fast Track Roofing and Remodeling, and they manage every step of the process for us.
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7. Sell the property
After the rehab is over, find a real estate agent and put the house back on the market, this time for the house’s new, retail-ready value. An excellent real estate agent will manage this process for you, so when you come to closing next time, you’ll walk away with your realized gains from your smart investment.